REG - Ferrexpo plc - Full Year Financial Results for 2022
15/03/2023 07:00
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RNS Number : 9904S Ferrexpo PLC 15 March 2023
Ferrexpo plc
("Ferrexpo" or the "Company" or the "Group")
Full Year Financial Results for 2022
Ferrexpo plc (LSE: FXPO), a FTSE 250 iron ore pellet producer, announces its
audited financial results for 2022.
Lucio Genovese, Non-executive Chair of Ferrexpo, commented:
"For Ferrexpo, the year 2022 will be defined not only by the events since 24
February 2022, but also by the resilience and commitment of our workforce and
communities across Ukraine throughout Russia's invasion. With more than 95% of
our workforce of 10,000 based in Ukraine, we have worked tirelessly to support
them, their families and local communities since the start of the war, and we
will continue to do so. Through years of investment in our people and our
assets, working to build a resilient business, we have fortunately been able
to continue to operate for most of the year. In doing so - we have been able
to provide humanitarian support to communities across Ukraine, as well as
support Ukraine's government via our continued contribution.
"Operationally, our assets have produced in line with accessible markets, with
the closure of Ukraine's access to the Black Sea placing a significant
impediment in our ability to access seaborne markets. We did, however,
continue to deliver throughout the year to our European customers. This is
testament to the long-term, sustainable relationships that we have built with
our customer base.
"Looking to the future, we see positives in Ukraine's potential as a supplier
of high grade, high quality iron ore to the global steel industry,
particularly in Europe, which is taking significant steps to reduce its
greenhouse gas emissions footprint and embark on decarbonisation pathways. As
a company with existing capacity to be one of the world's largest producers of
blast furnace iron ore pellets, we are well situated to serve this shift in
the near-term. Beyond blast furnaces, a number of steelmakers worldwide are
looking towards a longer term pathway to Green Steel and electric arc
furnaces, with direct reduction pellets representing a known pathway for Green
Steel production. As such, we have continued to develop our offering of this
particular product, which represented 6% of our production in 2022 (2021: 4%).
"We have navigated a difficult year with resilience. Our team has shown
commitment to our stakeholders - ranging from our humanitarian efforts, to
supporting the Ukrainian government through their need for industry to keep
operating. We have remained in constant dialogue with our customers and
investors throughout this war, and I would like to thank all of our
stakeholders for the commitment shown to us during 2022. We look forward to a
brighter future for Ukraine, whereby Ukrainians can realise their country's
true potential, and we look forward to supporting this next phase of growth."
Financial highlights for 2022:
· Revenue: 50% lower at US$1.2 billion as a consequence of the war
in Ukraine, with operational and logistics constraints imposed as a result
(2021: US$2.5 billion).
· Underlying EBITDA(A)(:) 47% reduction to US$765 million in 2022
(2021: US$1,439 million), reflecting a balance of lower production and market
factors, partially offset by an operating foreign exchange gain of US$339
million.
· Net cash flows from operations of US$301 million (2021: US$1,094
million), with operations remaining profitable despite the significant
challenges posed by the war in Ukraine.
· Capital investment(A) of US$161 million in 2022, with a range of
sustaining and expansion projects progressed in 2022, despite the war in
Ukraine (2021: US$361 million).
· Net cash position maintained despite the restrictions imposed as
a result of the war in Ukraine, with a 9% decline seen in 2022 to US$106
million as at 31 December 2022 (31 December 2021: US$117 million).
Financial summary for 2022:
US$ million (unless otherwise stated) Year ended 31.12.22 Year ended 31.12.21 % Change
Pellet production (kt) 6,053 11,220 (46%)
Sales volumes (kt) 6,183 11,350 (46%)
Average Platts(( 1 (#_ftn1) )) 65% Fe iron ore fines price (US$/t) 139 186 (25%)
Revenue 1,248 2,518 (50%)
Average C1 cash cost(A) (US$/t) 83.3 55.8 +49%
Underlying EBITDA(A) 765 1,439 (47%)
Diluted EPS (US cents) 37.4 147.9 (75%)
Net cash flow from operating activities 301 1,094 (72%)
Capital investment(A) 161 361 (55%)
Net cash 106 117 (9%)
Cash and cash equivalents 113 167 (32%)
Safety and wellbeing:
· Safety performance at Ferrexpo's operations remains strong, with
a second successive fatality-free year and lost time injury frequency rate of
0.51 continues materially below the Group's historic trailing average
(2017-2021: 0.83).
· Tragically, we are aware of the loss of 20 lives from our
workforce serving in the armed forces of Ukraine.
· Focus on the wellbeing initiatives for our workforce, as the war
in Ukraine enters its second year.
Market factors:
· Iron ore prices (65% Index)(( 2 (#_ftn2) )) declined by 25% to
US$139 per tonne, down from record highs as a result of post-Covid stimulus
packages during 2021. Iron ore fines index remains in line with level seen in
2020 (2020: US$122 per tonne).
· Pellet premiums continue to show resilience, demonstrating
underlying strength of pellet market fundamentals, with Atlantic Pellet
Premium(( 3 (#_ftn3) )) rising by 20% to US$72 per tonne in 2022 (2021: US$60
per tonne)(( 4 (#_ftn4) )).
· Ferrum premium, which is the premium paid for high grade iron
ores over medium grade irons ores, remained in line with 2021 at 15% of the
benchmark medium grade index (2021: 16%), demonstrating resilient demand for
higher grade iron ore, which helps steelmakers to improve blast furnace
productivity and reduce their emissions(1).
· C3 freight index, indicative of global freight rates for iron
ore shipments, fell 9% to US$24 per tonne, reflecting the lower demand for
iron ore during the year (2021: US$27 per tonne)(( 5 (#_ftn5) )).
Operational factors:
· Iron ore pellet production of 6.1 million tonnes in 2022 (2021:
11.2 million tonnes), with this 46% reduction coming as a consequence of the
restrictions imposed by the war in Ukraine.
· Operations continued to ship products to customers throughout
2022, despite electricity shortages experienced in 4Q 2022.
· Full year iron ore sales of 6.2 million tonnes (2021: 11.4
million tonnes), with year on year performance mirroring iron ore pellet
production.
· Investment in growth continues with completion of the first
stage of the Group's press filtration complex, which will increase pellet
quality and lower natural gas consumption per tonne of production, once
operations return to nameplate capacity.
· C1 Cash Cost of Production(A) ("C1 costs(A)") of US$83.3 per
tonne reflect lower production volumes in 2022, higher input prices for key
consumables and constraints imposed as a result of the conflict in Ukraine.
· As of late February 2023, the Group has resumed operations at
the second (of four) pelletiser lines, following progress made in the
stabilisation of Ukraine's electricity network. The Group intends to continue
producing at between one and two pelletiser lines for the coming months,
assuming that the war in Ukraine does not deteriorate the operating
environment.
Environment, social and governance ("ESG") factors:
· Inaugural Climate Change Report published in December, with
updated and broadened greenhouse gas emissions targets.
· Reduction in greenhouse gas emissions footprint in 2022, despite
the war in Ukraine:
o Scope 1 and 2 emissions cut by a further 1% (combined)(( 6 (#_ftn6) )),
placing Ferrexpo 31% below its baseline year of 2019.
o Scope 3 emissions also cut by 1%; Group is now 3% below its baseline year
(2019) for this category of emissions.
· Independent assurance process completed on reporting of selected
emissions and safety data for 2022, in line with process completed for 2021
data.
· Publication of seventh standalone Responsible Business Report,
covering ESG activities, in both English and Ukrainian, helping to engage with
all stakeholders at the local and global level.
· Progress in diversity, equity and inclusion continues, with
proportion of managerial roles held by women increasing to 20.9% (2021:
20.1%). Female representation in overall workforce of 28.7% in 2022 (2021:
29.2%).
Corporate governance topics:
· Executive Director Jim North confirmed as permanent Chief
Executive Officer in February 2022.
· Resignation of Non-executive Director Kostyantin Zhevago in
December 2022.
· Yaroslavna Blonska appointed Acting Chief Marketing Officer in
August 2022.
· Independent Non-executive Director Ann-Christin Andersen has
notified the Board that she will not stand for re-election at the Company's
next Annual General Meeting in May 2023.
· Female representation of 43% on Ferrexpo's Board of Directors as
at 31 December 2022 (31 December 2021: 38%).
Stakeholder engagement activities
In light of the continued risks posed to Ferrexpo by the ongoing war in
Ukraine, the Group's management team will not be hosting an open access call
with investors. This approach is in line with the Group's 2021 Full Year
Results and 1H 2022 Interim Results, and is a decision that has been made on
the basis of the safety and wellbeing of our people in Ukraine. The Group's
management team will, however, be hosting an event for analysts at 9:30am on
15 March 2023. For those interested in attending, please contact
ferrexpo@tavistock.co.uk (mailto:ferrexpo@tavistock.co.uk) . Ahead of the
aforementioned analyst event, a presentation will be uploaded to the Group's
website at the following address:
https://www.ferrexpo.com/investors/results-reports-and-presentations/
(https://www.ferrexpo.com/investors/results-reports-and-presentations/)
The Group expects to host its Annual General Meeting in May 2023 and will
update the market accordingly at this event.
Alternative Performance Measures
Words with the suffix A are defined in the Alternative Performance Measures -
see pages 75 to 76 for more information.
In this report, the terms "Ferrexpo", the "Company", the "Group", our
"business", "organisation", "we", "us", "our" and "ourselves" refer to
Ferrexpo plc and, except where the context otherwise requires, its
subsidiaries.
Additional information
For further information, please contact:
Ferrexpo:
Rob Simmons r.simmons@ferrexpo.ch (mailto:r.simmons@ferrexpo.ch) +44 207 389 8305
Tavistock:
Jos Simson ferrexpo@tavistock.co.uk (mailto:ferrexpo@tavistock.co.uk) +44 207 920 3150
Emily Moss +44 7788 554 035
Gareth Tredway
The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit)
Regulations 2019. The person responsible for making this notification is Mark
Gregory, Company Secretary.
About Ferrexpo:
Ferrexpo is a Swiss headquartered iron ore company with assets in Ukraine and
a premium listing on the London Stock Exchange in the FTSE 250 index (ticker
FXPO). The Group produces high grade iron ore pellets, which are a premium
product for the global steel industry and enable reduced carbon emissions and
increased productivity for steelmakers when the Group's iron ore pellets are
converted into steel, compared to more commonly traded forms of iron ore.
Ferrexpo's operations have been supplying the global steel industry for over
50 years, and in 2022 the Group produced 6.1 million tonnes of iron ore
pellets, despite the war in Ukraine. Historically, Ferrexpo has been the
world's third largest exporter of pellets to the global steel industry,
recently having a market share of approximately 9% in 2021. The Group has a
global customer base comprising of premium steel mills around the world, which
includes steel mills in Austria, Germany, Japan, South Korea, Taiwan, China,
Slovakia, the Czech Republic, Turkey, Vietnam and America. For further
information, please visit www.ferrexpo.com (http://www.ferrexpo.com) .
Chair's Statement
The year 2022 will long be remembered as a consequence of Russia's escalation
of its invasion of Ukraine. It is a significant moment in the history of our
planet, and we remain committed to Ukraine and our people at this difficult
time.
At Ferrexpo, we are proudly Ukrainian. Ferrexpo has successfully operated in
Ukraine for more than 15 years since our listing, and we have consistently
invested in Ukraine, our people and our assets. Over this time, our
constructive relationships have helped us build a company that is capable of
producing some of the highest quality forms of iron ore that are commercially
available.
The world has supported Ukraine as it defends itself from Russia's invasion.
We have remained committed to Ukraine throughout this conflict, through
providing vital humanitarian support to those in need, whilst continuing
production and our contribution to the Ukrainian economy. We have nearly
10,000 people in our workforce, with 95% normally based in Ukraine, and we
have strived to support them, their families and local communities throughout
this conflict. On a national scale, Ferrexpo represents a significant
contributor to the Ukrainian economy through taxes and royalties, as well as
our consistent use of Ukraine's infrastructure and serving as a major employer
in our region of Ukraine. We are proud that our resilient business model, and
focus on high quality products, has enabled us to continue shipments to our
European customers throughout 2022.
Resilience and commitment
In reviewing what we have learnt from the past year, two key themes are
evident: resilience and commitment. Ukraine's resilience has been apparent in
newspapers around the world for more than 380 days. At our operations, we have
seen our workforce come together with local communities.
In an effort to streamline our support, we established a dedicated
humanitarian fund early in the conflict, as it quickly became apparent that
large businesses would need to support communities. Through more than 70
individual projects, I am proud to reflect on the direct support that we have
been able to provide, and will continue to offer, with over US$19 million of
humanitarian aid provided to date. I am also proud that Ferrexpo has supported
3,500 internally displaced people fleeing the war as they pass through our
area.
As the war enters its second year, we are mindful of the wellbeing of our
workforce and the effects of living in a war zone. As such, we are offering
free support services to those at our operations.
I am proud of the commitment that we have shown to our stakeholders, and
indeed the commitment that they have shown us. In Ukraine, we have worked
closely with communities to provide support through our newly formed
humanitarian fund and the long-standing Ferrexpo Charity Fund. Resilience is
also evident in our operations and marketing teams, with their efforts
enabling us to continue shipping throughout 2022. As a modern company, we are
increasingly reliant on electronic equipment for managing our operations, and
therefore protecting our IT infrastructure from cyberattacks has been critical
since the war began - more on our efforts here on page 47.
More broadly, we have also continued our decarbonisation strategy in
publishing our Climate Change Report as scheduled in 4Q 2022, as well as
providing clear and timely communications with stakeholders throughout the
war. We are also grateful to our customers, who have shown commitment to our
products, and I would like to thank them for their continued support, which is
only possible through long-standing positive relationships.
Understanding our role in Ukraine
We are a major business in Ukraine and, as such, we are a significant
contributor to the local economy and economy of Ukraine. In 2022, we
contributed US$164 million in taxes and royalties, and we have continued
supporting our workforce through our continued operations. We are frequent and
consistent users of Ukraine's utilities and infrastructure, helping to
contribute to the functioning of Ukraine beyond our own operations. Through
our position as one of the world's largest iron ore pellet producers, we are
able to be a significant contributor to Ukraine's exports, representing 3% of
total exports by value in 2022, despite a 46% decline in production and 25%
lower iron ore prices in 2022.
Our footprint in Ukraine extends beyond our own operations, and we are proud
to support local businesses and local communities. Of the people that we
employ in Ukraine, almost all are based in local communities, and 79% of our
recruitment in 2022 was from local communities.
Board developments
The past year has brought a number of changes to strengthen the Board; we
welcomed Fiona MacAulay into the role of Senior Independent Director,
Ann-Christin Andersen in the role of Chair of the Health, Safety, Environment
and Community ("HSEC") Committee and Natalie Polischuk joined the Board in
December 2021. Furthermore, Jim North was appointed as permanent CEO in
February 2022. In addition, Non-executive Director Kostyantin Zhevago stepped
down from the Board in December 2022.
Looking to the future
Reflecting on our long-term strategy as a business, we remain committed to
Ukraine and its potential. There is a significant challenge ahead, once the
war ends, for companies and communities to help with the rebuilding and
healing of Ukraine.
More broadly, we are pleased to see the global shift in the steel market
towards higher grade, higher quality materials as a route to lower emissions
across the steel value chain. High grade iron ore has been a strategic
priority of Ferrexpo's since listing in 2007, and we are proud to be able to
help facilitate decarbonisation in the steel industry, which accounts for 7%
of global greenhouse gas emissions(( 7 (#_ftn7) )).
The coming period will be difficult given the continued war in Ukraine, but if
we are to look beyond the war, we continue to be excited by Ukraine's
potential and the future that lies ahead in Green Steel. Through working with
our stakeholders, we are proud to have built the business that we have today,
and the potential that it has for the future.
Finally, I would like to thank all of our stakeholders, particularly those in
Ukraine, for their continued commitment to Ferrexpo. I am hopeful that we will
soon see an end to the conflict, and then we can look towards a brighter
future for Ukraine.
Slava Ukraini.
Lucio Genovese
Chair, Ferrexpo plc
Case Study: War in Ukraine
As a business operating in Ukraine at the current time, we have been
significantly impacted by the ongoing war. Here we explore a selection of
these impacts, and the outlook for further consequences.
Our people
Our first priority will always be the safety and wellbeing of our people.
Currently, we have more than 1,500 people absent from our workforce, including
approximately 650 members of our workforce serving in the Armed Forces of
Ukraine(( 8 (#_ftn8) )), who we have supported with key protective equipment
such as bulletproof vests. Certain areas of our business are affected more by
absences than others, and the situation is helped by our operations running
below capacity. We are increasingly working to assist wellbeing - including a
programme to provide counselling to those returning from the armed forces, and
a rehabilitation centre for those returning to work after service.
Regrettably, we are now aware of 20 members of our team have died whilst
serving in Ukraine's military, and we are supporting their families(2).
Remembering those we have lost
As of 10 March 2023, we are aware of a total of 20 members of our team that
have sadly died whilst serving in the Armed Forces of Ukraine, and we are
supporting their families at this difficult time.
Dmytro Belikov, age 32 Serhiy Kharlamov, age 57 Oleksandr Scherbakov, age 28
Oleksiy Bridnya, age 33 Serhii Kondyk, age 31 Denys Svyrydov, age 50
Andriy Chernya, age 37 Denys Koshovyi, 30 Yaroslav Taran, age 50
Oleksandr Chugainov, age 54 Rostyslav Ledovskyy, age 25 Oleksandr Terlenko, age 48
Maksym Chystyakov, age 24 Dmytro Lysachenko, age 28 Oleksiy Yatskov, age 36
Andrii Dukanych, age 33 Roman Lytvynenko, age 31 Anatoliy Zakupets, age 37
Oleksiy Khanilevych, age 24 Kostyantyn Orchikov, age 30
Slava Ukraini.
Local communities
It was quickly apparent in the early stages of the conflict that the people of
Ukraine would need humanitarian support at this difficult time. The Ferrexpo
Humanitarian Fund has helped channel support to more than 70 projects since
the start of the war(2) - see page 31 for more details.
Logistics constraints
The closure of Ukraine's access to the Black Sea has severely restricted our
access to seaborne markets and has therefore limited our ability to pivot
sales according to regional demand around the world - as seen previously
during the global Covid-19 pandemic. Access to the seaborne market is possible
today, but at an elevated cost and with additional restrictions.
Power supply
In late 2022, Russian attacks on civilian electrical infrastructure increased,
with a significant impact on electricity generation and supply. Following the
onset of this phase of the war, the Group was not able to achieve stable
production for approximately ten weeks of 4Q 2022. As a means of reducing
operational risk around further power shortages, we are replenishing pellet
inventories at strategic locations, as well as exploring our options around
self-generation of electricity.
Local currency and economy
The Ukrainian hryvnia depreciated by 34% during the course of 2022(( 9
(#_ftn9) )), and this has impacted operating costs and carrying value of
assets - see page 11 for more details. Looking forward, it is expected that,
should the war continue, the Ukrainian hryvnia will continue to depreciate
further. Furthermore, the Ukrainian economy experienced an inflation rate of
27% in 2022(( 10 (#_ftn10) )).
Supplier constraints
Throughout 2022, we have continuously adapted to an ever-changing operating
environment, including changing suppliers for key inputs as individual
suppliers are forced to close their operations or divert logistics paths. We
expect to have to continue to adapt and evolve our supply arrangements, to
ensure supply and reduce risk, for as long as the war continues.
CEO's Review
The morning of 24 February 2022 will live long in the memory. Russia's
invasion of Ukraine has defined our year, but we are proud of the resilience
shown by our workforce in continuing to support Ukraine's economy.
We have a workforce of 10,000 people, with more than 95% of them based in
central Ukraine and it is our duty to protect and support them. I am proud to
have been a part of Ferrexpo in 2022, as we have sought to engage with our
workforce and communities across Ukraine at such a difficult moment in
history, to understand what we could do to help.
Supporting Ukraine
Through the creation of the Ferrexpo Humanitarian Fund, we have been in a
position to provide direct support to those in need, as well as help our
suppliers and customers provide contributions to fight the effects of the
humanitarian crisis that is unfolding in Ukraine. Through this fund, and
additional support projects provided directly by our subsidiaries, we have
provided more than US$19 million of targeted humanitarian assistance to date,
supporting over 70 initiatives across eight regions of Ukraine. Each
individual project is reviewed and approved by the Health, Safety, Environment
and Community ("HSEC") Committee to ensure good governance practices remain,
even in a war zone. For more on our humanitarian efforts, see page 31.
Despite the war in Ukraine and the difficulties our people have experienced in
2022, our safety performance has remained strong. We remain fatality-free for
the second year running, and our lost time injury frequency rate continues to
be materially below the level recorded by our peers. See page 21 for more on
our safety performance.
Drive towards Green Steel
As a constituent of the steel value chain, we understand the importance of
climate change and how this point in time represents a pivotal moment for the
steel sector, with major investment planned in the coming decades. As a
producer of a form of iron ore that helps steelmakers reduce emissions, we are
in a position to supply the global steel industry with blast furnace pellets
today to reduce emissions by 40%(( 11 (#_ftn11) )) as they switch away from
sinter fines. In parallel, we are developing our offering of direct reduction
pellets, which represent a potential pathway to low emissions Green Steel,
positioning us well for the future.
Our progress in decarbonisation, which to date has seen us realise a 31%
decrease in emissions since our baseline year, has begun well and we intend to
maintain our positive momentum in reducing our emissions. We are excited by
our stakeholders' desire to understand our decarbonisation pathway, and we are
looking into ways to collaborate together going forward. Through our work with
environmental consultants Ricardo Plc, we were also able to present expanded
targets for our emissions reduction programme - please see our Climate Change
Report, which was published in December 2022, for more details.
Operating in a time of war
Production volumes fell by 46% in 2022, primarily reflecting the constraints
imposed by the war in Ukraine and the deterioration of the economic
environment in Europe as energy prices and inflationary risks rose throughout
the year. The war's restrictions on our access to the Black Sea have made
logistics routes for sales outside of Europe less cost effective, but this
topic is a clear catalyst for 2023 should our Black Sea access resume.
Sales volumes in 2022 reflected accessible markets, with sales in the first
quarter remaining buoyant as short-term supply disruption led to steelmakers
building raw materials inventories. Subsequently, sales declined throughout
the year as the complexity of the restrictions on our business increased. We
did, however, continue to deliver our products to our European customers
throughout the year, which is a testament to the resilience and commitment of
our marketing and operations teams.
A committed leadership team
Given the conflict in Ukraine, it is easy to overlook our achievements in
bolstering the management and governance of our business. My appointment as
permanent Chief Executive Officer was announced in February 2022. In the same
month, Fiona MacAulay and Ann-Christin Andersen were appointed as Senior
Independent Director and Chair of the HSEC Committee respectively, and on 30
December 2021 we announced the appointment of an additional Independent
Non-executive Director, Natalie Polischuk. The appointments of Fiona,
Ann-Christin and Natalie bolster our leadership from a diversity perspective,
and we are seeing progress in our executive management team - Yaroslavna
Blonska was appointed Acting Chief Marketing Officer in October 2022, and in
2022 the proportion of our management positions held by women increased to
20.9% (2021: 20.1%).
It is important to thank all of our stakeholders for their commitment to
Ferrexpo in 2022. It is our committed workforce, the communities that grant us
our licence to operate, our long-standing customer and supplier relationships,
and other key relationships, that have helped to support us throughout this
war. Through operating a resilient business model, we aim to come through this
difficult time as a stronger company, and this would not be possible without
this continued support.
Jim North
Chief Executive Officer, Ferrexpo
Market Review
Reduced levels of price volatility were seen in 2022 compared to 2021. Whilst
iron ore prices declined by 25%, blast furnace pellet premiums rose by 20%,
which reflects shifting demand for high quality products.
The Group primarily generates its revenues through the sale of iron ore
pellets, the pricing of which is governed by a number of quoted market
benchmarks, generating a net realised pellet price. The main contributing
components to the pricing of Ferrexpo's pellets are the high grade (65% iron,
"Fe") iron ore fines index, the pellet premium, a rate applicable for the
freight component of transporting material to customers, and any applicable
additional premiums and discounts. The Group currently only produces high
grade products, grading either 65% Fe or above, and therefore the following
text focuses on the high grade index for iron ore fines pricing.
Iron ore fines prices
The index for high grade (65% Fe) iron ore fines began the year at US$140 per
tonne and rose to more than US$190 per tonne as of early March, before
steadily declining to a low of US$91 per tonne in late October. The primary
factor behind this initial rise during 1Q 2022 was the rising risk of conflict
in Ukraine, ultimately followed by Russia's invasion commencing in February,
which put pressure on global iron ore prices as steelmakers sought to source
alternative suppliers to Russian iron ore. This short-term tightness in the
iron ore market largely persisted into 2Q 2022, before the impact of elevated
energy prices and concerns over the global economic outlook, particularly for
the Chinese economy, began to erode confidence in end-user markets. Prices
declined by approximately US$40 per tonne between early June and early July,
before exhibiting a more gradual decline thereafter, with market commentators
citing concerns over steel margins in China and local restrictions within
China related to the global Covid-19 pandemic as the reasons for this
decline(1).
Moving into 2H 2022, efforts by steel mills to stockpile material slowed, as
they began to secure access to alternative raw material supply channels, and
demand for iron ore started to normalise. As such, the drivers behind price
movements returned to Chinese supply/demand dynamics for iron ore and steel,
with China representing the largest market for seaborne iron ore and the main
determinant of iron ore prices globally. The beginning of 2H 2022 coincided
with weak demand for iron ore and steel, especially with sentiment dampened by
strict Covid-19 restrictions in China. A key effect of these restrictions was
the impact on consumer sentiment in local property markets, which is a major
user of finished steel in China. This generated a gradual decline in iron ore
pricing until early 4Q 2022. Expectations arose in October regarding a
potential unlocking of restrictions in China, but these were short-lived after
the Chinese government reiterated existing policies, sending prices to the
full year low of US$91 per tonne in late October. Iron ore prices did
ultimately recover as restrictions in China were eventually eased towards the
end of 4Q 2022, ending the year at US$131 per tonne.
Overall, the full year iron ore price declined by 25% in 2022, broadly
reflecting weaker demand as a consequence of the conflict in Ukraine and
concerns over the Chinese economy. It should also be noted that the
comparative period (2021) represented a robust year across the commodity
space, as governments worldwide continued to supply fiscal stimulus in
response to Covid-19, with iron ore pricing in 2019 and 2020 being US$104 and
US$122 per tonne respectively - in line with the figure for 2022(( 12
(#_ftn12) )).
Towards the end of 2022, it was widely expected that 2023 would see a
contraction in global markets, with economies worldwide already witnessing a
slowdown in growth during 2H 2022, as energy prices remained elevated and
central banks sought to contain inflationary pressures by raising interest
rates. However, recent news and developments in China, such as reports of a
potential easing of Covid-19 restrictions, have resulted in iron ore prices
rising to US$138 per tonne as at the end of February 2023. Futures contracts
reflect the current uncertainty in the market, with contracts for December
2023 deliveries (62% Fe Index) trading at a level US$8 per tonne below today's
spot market.(( 13 (#_ftn13) ))
The supply side of the iron ore fines market is widely expected to remain
balanced in 2023, with supply from the major producers in Brazil and Australia
expected to remain largely in line with the same level of output seen in
2022(( 14 (#_ftn14) )).
High grade premiums
The premium for high grade iron ore, being the difference between the 65% Fe
Index and the 62% Fe Index, contracted in 2022 in line with the benchmark
indices, falling by 28%. This contraction is expected at times of steel market
weakness, when steel margins are reduced and steelmakers seek to utilise lower
grade inputs to reduce raw material costs, reflecting a more conservative
approach. Similar to the fines index, the ferrum premium of US$19 per tonne in
2022 was ahead of levels seen in recent years (2019 and 2020: US$11 and US$13
per tonne respectively) or in line with other recent years (2018: US$21 per
tonne). The year-on-year comparison, however, shows a 28% reduction, with 2021
being a relatively high year for commodities pricing (2021: US$26 per
tonne).(1)
Given the correlation of the grade of iron ores and the degree of emissions
produced by steelmakers, with higher grade ores requiring the production of
lower emissions to generate steel, it is expected that the ferrum premium will
continue to widen over the long term.
Pellet premiums
The pellet premium is a significant factor in the cash flow generation of a
pellet producer, with this component of pricing typically representing a
significant additional premium over and above the prevailing iron ore fines
index. For example, the Atlantic Pellet Premium(1) represented a 60% premium
above the 62% Fe iron ore fines index in 2022 (2021: 38%).
The high level of the pellet premium (relative to benchmark fines prices)
reflects the scarcity of iron ore pellets relative to the global fines export
market. In 2022, the global pellet export market represented approximately 111
million tonnes 15 (#_ftn15) , compared to global fines export trade of 1.1
billion tonnes 16 (#_ftn16) . In addition, iron ore pellets typically offer
steelmakers the opportunity to raise mill productivity and lower emissions due
to higher grades and the lack of a requirement for sintering, which is a
process that typically utilises coal as its energy source.
Global exports of pellets decreased by approximately 15% in 2022, reflecting a
reduction in supply from almost all major iron ore pellet exporters for a
variety of reasons. Pellet exports from Russia have seen the largest
year-on-year decrease, falling by approximately 7 million tonnes as
steelmakers switch suppliers following Russia's invasion of Ukraine.
Additionally, lower pellet demand from Chinese steel mills, with this demand
down approximately 60% in 2022, has resulted in lower export volumes for
pellet producers that have historically supplied this market - with Brazilian
and Indian exporters accounting for approximately half of this decrease(1).
Regionally, 2022 saw a clear split in the health of global steel markets, with
those markets more closely correlated to Russian energy supply (such as
Europe) seeing the greatest decline in demand for pellets. European steel
mills imported approximately one third lower volumes of iron ore pellets in
2022, with this reduction seen in both Western and Eastern Europe. Outside of
China, Asian steel mills saw a lower reduction in buying activity, with a 14%
reduction year-on-year. The Middle East and North Africa ("MENA") region,
which is a region less dependent on Russian energy supply, saw a 7% increase
in pellet buying activity in 2022.
An additional factor helping to promote our exports to the MENA region is that
this region typically purchases direct reduction ("DR") pellets. Since DR
pellets have a lower emissions footprint than other forms of iron ore, we are
directing our strategy towards this product and actively growing our footprint
in this region.
As a result of tightness in pellet markets outside of China in 2022, both the
Atlantic pellet premium and DR pellet premium rose materially during the year,
and therefore trended in the opposite direction to iron ore fines prices. This
divergence is due to iron ore fines and pellets having different key drivers -
China accounted for 75% of global iron ore fines imports in 2022 (2021:
76%)(2), and is therefore the dominant market for this product. For pellets,
the key markets are Europe and markets in North East Asia, where independent
steelmakers(( 17 (#_ftn17) )) in these two regions collectively accounted for
60% of defined pellet imports in 2022 (2021: 58%)(1). Factors related to
climate change and decarbonisation, with the pace of legislative change faster
in Europe than other markets, are expected to have a greater bearing on the
pricing of iron ore pellets as a result of this link to European buying.
Summary of industry key statistics
(All figures US$/tonne, unless stated otherwise) 2022 2021 YoY change
Iron ore fines price (62% Fe, CFR China)(( 18 (#_ftn18) )) 120 160 (25%)
Iron ore fines price (65% Fe, CFR China)(4) 139 186 (25%)
Average 65% Fe spread over 62% Fe(4) 19 26 (28%)
Atlantic (blast furnace) pellet premium(4) 72 60(( 19 (#_ftn19) )) +20%
Direct reduction pellet premium(4) 87 73(5) +18%
C3 freight (Brazil - China)(( 20 (#_ftn20) )) 24 27 (9%)
C2 freight (Brazil - Netherlands)(6) 13 14(5) (11%)
Global steel production (million tonnes)(( 21 (#_ftn21) )) 1,832 1,912 (4%)
Within the year, the Atlantic pellet premium(4) rose by 41% in 1H 2022 (in
contrast to the iron ore fines price, which remained broadly flat).
Stockpiling efforts, which were in response to increased risk of supply
disruption following Russia's invasion of Ukraine in February 2022, resulted
in an increase in pellet premiums in 1H 2022. This buying activity was,
however, not matched by end-user demand and raw material stockpile inventories
increased, particularly in Europe. With high prices for raw materials and
energy inputs, steel margins in Europe decreased in the middle of 2022,
subsequently prompting several blast furnaces to suspend operations in Europe.
By October, a total of ten blast furnace steelmaking facilities in the region
idled at least part of their operations(2).
High pellet inventories, coupled with low blast furnace steel output, resulted
in a reduction in pellet demand, and Atlantic pellet premiums fell to
approximately US$60 per tonne towards the end of 4Q 2022.
Whilst pellet buying in European and Asian regions declined in 2022, a
significant proportion of pellet sales are conducted via long-term contract -
providing an additional degree of stability (for example, 96% of Ferrexpo's
pellet sales in 2022 were under long-term contract). This therefore provides
stability for individual pellet producers, and the overall pellet market,
throughout the commodity cycle.
Looking ahead to 2023, it is expected that the overall size of the pellet
export market will revert to a similar size as seen in recent years (c.130
million tonnes), with the pace of this recovery dependent on the war in
Ukraine and any resulting easing of constraints related to energy supply
(particularly energy supply into Europe). China's expected easing of Covid-19
restrictions boosted iron ore fines pricing in late 2022, albeit with
relatively little firm evidence of increased economic output(( 22 (#_ftn22)
)). Should China deliver a recovery in its growth rate, which saw 3% growth in
2022 compared to 8% in 2021(( 23 (#_ftn23) )), it should be expected that
blast furnace pellet premiums will stabilise at current levels. Pellet demand
from European steel mills in 2023 is expected to be linked to energy prices,
inflation rates and the outlook of the war in Ukraine. To mitigate risks to
the Ferrexpo business, it is important for the Group to resume access to
ex-European markets in 2023 to provide support for realised pellet premiums.
Freight rates
During the year, the C3 freight rate, which describes the cost of shipping dry
bulk materials from Brazil to China, rose from a low of US$17 per tonne in
January to a peak of US$38 per tonne in May, with this increase associated
with rising energy costs and buoyant commodity markets. In 2H 2022, the same
freight index declined to US$22 per tonne by the end of 3Q 2022, where it then
largely remained for 4Q 2022. This decline in 2H 2022 can be attributed to an
economic slowdown in China, partially related to local "zero Covid" rules,
lower energy prices and lower commodity pricing driving reduced demand for
shipping.
At US$24 per tonne, the average C3 freight rate for 2022 represented a level
US$3 per tonne below the previous year as global demand for dry bulk cargoes
weakened.
Looking ahead, freight rates are expected to remain above historical averages
seen in years prior to the global Covid-19 pandemic, with elevated levels
already seen in 2021 and 2022. This shift reflects higher energy costs and the
potential for costs associated with stricter environmental regulation to be
passed on to end users.
Steel
Ferrexpo's iron ore pellets are used by steelmakers to produce steel. Factors
such as global steel production, pricing and margins therefore have a direct
impact on the benchmark indices used in the pricing of pellets.
World steel production in 2022 fell by 4% to 1.8 billion tonnes, with a 2%
contraction in China and larger declines in developing economies such as the
European Union (11% decrease), Japan (7% decrease) and the United States (6%
decrease)(( 24 (#_ftn24) )). Even before the war in Ukraine started,
production rates were slower at the start of the year than in 2021, with
global output down 6% as of February 2022. This deficit largely remained
intact throughout the remainder of the year.
Pricing for hot rolled coil ("HRC") in Europe began the year at €960 per
tonne, before rising sharply to over €1,400 in late March, as steelmakers
were able to transfer the rising cost of raw material inputs to end users.
European economies demonstrated slowing growth throughout 2022, as a
consequence of Russia's invasion of Ukraine, elevated energy prices and
inflationary pressures, and consequently have shown lower levels of end-user
demand for steel. As a result, HRC steel prices declined to below €700 per
tonne by the end of the year, representing a level 33% below the start of the
year. A similar trend was seen in China throughout 2022, albeit to a less
pronounced extent, due in part to a lower exposure to Russian energy. Chinese
HRC prices rose in 1Q 2022 to approximately 10% above the start of the year,
then declined to 21% below this level as of the end of the year(( 25
(#_ftn25) )).
Looking ahead to 2023, the World Steel Association's Short Range Outlook,
issued in October 2022, projects a small recovery in steel production, with 1%
growth to 1.8 billion tonnes. This growth is attributed to infrastructure
demand, despite concerns over high inflation, monetary tightening and China's
slowdown.
Developments in Green Steel
A number of major steel producers announced initiatives to produce Green Steel
in 2022, which is the manufacturing of steel without the use of fossil
fuels(( 26 (#_ftn26) )), often announcing agreements with end users
(typically with the automotive sector) for the offtake of this material. The
cost of Green Steel is estimated to be up to 60% higher than current prices,
with this difference primarily related to the expected additional cost of
producing and using green hydrogen.(( 27 (#_ftn27) )) Whilst trial quantities
of Green Steel were produced in Sweden in 2022, widespread commercial
production is not expected to commence until the medium to long term(1).
Case Study: Logistics flexibility in a war
The war in Ukraine has highlighted the importance of having flexibility and
diversity within our logistics chain, with Ukraine's railways and our inland
waterway subsidiary providing essential services during the year.
Disruption due to conflict in 2022
As summarised on page 5, the war in Ukraine in 2022 has resulted in several
disruptive effects on Ukraine's logistics network, from the closure of
Ukraine's access to the Black Sea, to targeted attacks on the railway network.
Indirect effects of the war also included the diversion of Ukraine's grain
shipments to non-Ukrainian ports, putting additional pressure on Ukraine's
railway network.
Owner-operator model
At Ferrexpo, we have long sought to own and operate our logistics network,
either through the purchase of our own rail wagons, operating our own inland
waterway (barging) subsidiary First-DDSG, or owning a stake in a berth at a
port in Ukraine. This practice lowers operating costs (as utilising
state-owned railcars has an additional operating cost associated with them),
improves product quality control (since we can manage the maintenance of our
own railway wagons and vessels), and reduces operational risk. This final
point has been key during the war in Ukraine, when accessing European
customers has been periodically difficult via Ukraine's railway network.
Resilience in logistics
Whilst total shipments declined by 46% in 2022, shipments to Europe (being the
only practical market for us during the majority of 2022) only declined by
23%, as we managed to maintain vital logistics pathways to European customers.
This achievement is in part thanks to our strong relationship with Ukraine's
railway operator, which has maintained its operations under exceptional
circumstances, despite numerous attacks.
A key consideration for us to increase our production volumes will be when we
will gain additional clarity on our ability to deliver our products to
customers. A major development would be the reopening of Ukraine's ports, or
the re-establishment of access to seaborne markets via an alternative port
that is both cost effective and capable of handling material volumes. We are
in advanced discussions with an alternative port operator and are looking to
resume seaborne shipments in the near term.
Financial Review
Through a focus on premium products and effective cost controls, the Group has
maintained strong margins on our sales, facilitating a stable net cash
position year-on-year.
Summary
The war in Ukraine has shaped the operational and financial performance of our
business in 2022, with production and sales volumes 46% lower as a result of
the restrictions imposed by the conflict in Ukraine (see page 5 for a summary
of the impacts felt). Key drivers for the Group's financial performance in
2022 include a significant impairment of US$254 million and a net foreign
exchange gain of US$276 million (operating gain less non-operating loss), both
of which are related to the war in Ukraine.
The Group's lower production and sales, combined with escalating energy prices
and global inflation, C1 cash cost of production(A) ("C1 costs(A)") rose by
49%, resulted in a decline in Underlying EBITDA(A) and profit after tax by 47%
and 75% respectively. Despite the war, we continued to invest in our assets in
2022, with a further US$161 million of capital investment(A).
Revenue
Group revenues declined by 50% to US$1.2 billion in 2022 (2021: US$2.5
billion), which principally reflects the restrictions imposed on our business
due to the war in Ukraine (see page 5 for a summary of effects of the
conflict), which reduced pellet production by 46% to 6.1 million tonnes in
2022 (2021: 11.2 million tonnes).
Additional factors governing the Group's revenue in 2022 include a 25% decline
in the benchmark iron ore price (65% Fe), a 6% reduction in freight rates, and
an increase in pellet premiums. For more information on the market factors
governing pricing of the Group's products, please see pages 7 to 10.
Furthermore, during the course of the year the Group grew stockpiles of
finished products during 1H 2022 as the war in Ukraine created instability in
logistics pathways. Stockpiles were subsequently reduced in 2H 2022 as the
operating environment for production deteriorated, but sales volumes generally
continued. This pattern ultimately reflected in total production and sales
volumes remaining broadly in line in 2022 (2021: in line).
Seaborne freight revenue arising from cost and freight ("CFR") sales decreased
revenue by US$94 million compared to 2021, reflecting the net effect of lower
sales volumes to seaborne markets.
Revenues from the Group's barging and bunker operations, First-DDSG Logistics
Holding, increased by US$4 million in 2022 compared with 2021 as a result of
higher freight rates and bunker volumes and prices.
C1 cash cost of production(A)
The Group's average C1 costs(A) for 2022 was US$83.3 per tonne, compared with
US$55.8 per tonne in 2021, reflecting a 49% year-on-year increase. Key drivers
behind the higher level of C1 costs(A) include the 46% reduction in both iron
ore pellet production and sales volumes, with the war resulting in an amended
logistics landscape in 2022. The Group's higher unit C1 costs(A) were impacted
to a greater extent by the Group's fixed cost base in 2022, as a result of 46%
lower pellet production volumes.
In addition to the factors discussed earlier in this section, 2022 saw
significant cost inflation associated with energy prices and global inflation,
driven in part by the war in Ukraine and restricted global energy supply. As
an example of the variability of energy costs during the year, the Brent price
of crude oil rose from US$87 per barrel in January 2022 to a monthly peak of
US$123 per barrel in June 2022 (40% increase), before declining to US$81 per
barrel in December 2022(( 28 (#_ftn28) )). This escalation in energy pricing
during the course of the year represents a significant factor in the Group's
operating costs given that energy has historically represented more than 40%
of the Group's C1 costs(A) - see page 14 for more information.
In more detail, the energy-related components of the Group's C1 costs(A) are
electricity (primarily used in beneficiation operations), natural gas and
biofuels (used in the Group's pelletiser) and liquid fuels such as diesel
(principally used in mining operations). These energy costs represented a
combined 49% of the Group's C1 costs(A) in 2022 (2021: 45%), with natural gas
prices in Ukraine increasing by 129% between 3Q 2021 (at a time when prices
were in line with the average for 2021), and 1Q 2022, when supply risks
relating to Russia's invasion of Ukraine were realised. Since this initial
price spike, natural gas prices declined by 31% between 1Q and 4Q 2022,
reflecting lower than expected demand in global markets. Electricity prices in
Ukraine followed a similar trend in 2022, rising by 45% between 3Q 2021 and 1Q
2022, before prices subsequently retreated 18% by 4Q 2022(( 29 (#_ftn29) )).
As detailed in the Group's 2021 Annual Report and Accounts, Ukraine
implemented a new royalty regime for iron ore producers that came into force
in January 2022. This regime comprises a royalty payment based on the spot
iron ore (62% Fe) fines price, with no reference to pellet premiums or freight
rates, which is structured as follows: (1) at monthly iron ore prices (62% Fe)
less than or equal to US$100 per tonne, a royalty rate of 3.5% will apply to
iron ore product sales, (2) at prices less than or equal to US$200 per tonne,
a royalty rate of 5% will apply and (3) at prices above US$200 per tonne, a
royalty rate of 10% will apply. Royalties are not tiered and therefore the
rate applied will apply to the full price of the iron ore product being sold.
The regime outlined above compares to the previous iron ore royalty
calculation, whereby the Group paid a flat royalty rate of approximately
US$3.5 per tonne of all tonnes sold. As shown in the Market Review section
(see table on page 12), benchmark iron ore fines prices for material grading
62% Fe averaged US$120 per tonne in 2022 (2021: US$160 per tonne)(( 30
(#_ftn30) )). Given the level of monthly iron ore pricing in 2022, the impact
of the royalty rate on C1 costs(A) was US$7 per tonne in 2022.
In line with previous years, the Group's C1 costs(A) represent the cash costs
of production of iron pellets from own ore (to the mine gate), divided by
production volume from own ore, and excludes non-cash costs such as
depreciation, pension costs and inventory movements, as well as the costs of
purchased ore, concentrate and gravel. The C1 cash cost of production(A) (US
dollars per tonne) is regarded as an Alternative Performance Measure ("APM").
For further information, please see pages 75 to 76.
Key Financial Performance Indicators
US$ million (unless stated otherwise) 2022 2021 YoY change
Total pellet production (kt) 6,053 11,220 (46%)
Sales volumes (kt) 6,183 11,350 (46%)
Iron ore price (65% Fe Index, US$/t)(2) 139 186 (25%)
Revenue 1,248 2,518 (50%)
C1 cash cost of production(A) (US$/t) 83.3 55.8 +49%
Underlying EBITDA(A) 765 1,439 (47%)
Underlying EBITDA(A) margin 61% 57% +4pp
Debt servicing 42 215 (80%)
Capital investment(A) 161 361 (55%)
Closing net cash 106 117 (9%)
Selling and distribution costs
Total selling and distribution costs were US$236 million in 2022 (2021: US$340
million), reflecting lower sales to seaborne markets due to the war in
Ukraine. As a result, international freight costs from CFR sales decreased by
US$120 million compared to 2021.
General and administrative expenses
General, administrative and other expenses in 2022 were US$64 million (2021:
US$72 million), with this decrease mainly due to the net impact of higher
inflation and lower production volumes, with the latter a direct consequence
of the war in Ukraine.
Currency
Ferrexpo prepares its accounts in US dollars. The functional currency of the
Group's operations in Ukraine is the Ukrainian hryvnia, which has historically
represented approximately half of the Group's operating costs.
In 2022, the hryvnia depreciated by 34% from UAH 27 per US dollar as of 31
December 2021 to UAH 37 per US dollar as of 31 December 2022. The National
Bank of Ukraine ("NBU") set the exchange rate at approximately UAH 37 per US
dollar as of 21 July 2022, within the framework of the Martial Law entered
into force since 24 February 2022. As a result of the introduced Martial Law,
the NBU has introduced significant currency and capital control restrictions
in Ukraine. These measures limit the possibility to convert local currency
into US dollars, and the ability to transfer US dollars between onshore and
offshore accounts of the Group. See Note 15 (Commitments, contingencies and
legal disputes) for further information.
Ukrainian hryvnia vs. US dollar(( 31 (#_ftn31) ))
UAH per USD
Spot 28.02.23
36.5686
Opening rate 01.01.22
27.2782
Closing rate 31.12.22
36.5686
Average 2022
32.3423
Average 2021
27.2862
Operating foreign exchange losses
Given that the functional currency of the Ukrainian subsidiaries is the
hryvnia, a depreciation of the hryvnia against the US dollar results in
foreign exchange gain on the Group's Ukrainian subsidiaries' US dollar
denominated receivable balances (from the sale of pellets). The operating
foreign exchange gain in 2022 was US$339 million compared to a loss of US$38
million in 2021, when the hryvnia appreciated.
Non-operating foreign exchange gains/losses
Non-operating foreign exchange gains are mainly due to the reclassification of
US dollar denominated inter-company loans from quasi equity to operating
loans. In 2022, the Group recorded a non-operating foreign exchange loss of
US$63 million (2021: loss of US$3 million), which was driven by a 34%
depreciation of the hryvnia during the year against the US dollar, as well as
fluctuations in the euro/US dollar exchange rate. For further information,
please see Note 6 (Foreign exchange gains and losses) to the Consolidated
Financial Statements.
Underlying EBITDA(A)
Underlying EBITDA(A) in 2022 decreased by 47% to US$765 million, with this
decrease reflecting a 46% reduction in sales volumes, lower market factors,
including a 25% reduction in the benchmark iron ore fines price, and a 49%
increase in C1 costs(A.)
The Group's Underlying EBITDA(A) for 2022 includes a non-cash operating forex
gain of US$339 million (2021: non-cash operating forex loss of US$38 million).
Interest
Interest expense on loans and borrowings declined by 95% to US$0.5 million
compared to US$10 million in 2021, due to the repayment of the Group's
pre-export finance ("PXF") facility in June 2021. Other than trade finance
lines (utilised only in Q1 2022 for an average cost of 2.19%), the Group did
not have any financial debt in 2022 and, therefore, no related financial
expense (2021: average cost of debt of 4.7% driven by the PXF that was fully
repaid in June 2021).
Further details on finance expense are disclosed in Note 7 (Net finance
expense) to the Consolidated Financial Statements.
At the same time, interest income increased by 46% to US$0.9 million compared
to US$0.6 million in 2021, reflecting the higher global interest rate
environment.
Tax
In 2022, the Group's income tax expense was US$119 million (2021: US$200
million). The effective tax rate for 2022 was 35.0% (2021: 18.7%). The
increase in the effective tax rate was predominantly driven by an impairment
loss of US$254 million on the Group's non-current operating assets, which is
not tax deductible.
In 2022, the Group paid income taxes of US$110 million (2021: US$228 million),
of which US$91 million were paid in Ukraine (2021: US$221 million).
Further details on taxation are disclosed in Note 8 (Taxation) to the
Consolidated Financial Statements.
Items excluded from underlying earnings
The Group has recognised an impairment charge of US$254 million as a result of
a reduction in the carrying value of the Group's assets in Ukraine, and the
devaluation of the local currency exchange rate seen in 2022. Please see Note
10 (Plant, property and equipment) to the Consolidated Financial Statements
for more information.
In the prior period, an impairment charge of US$231 million was recognised as
at 31 December 2021, with this relating to stockpiled low grade ore as it
cannot be reliably predicted as to when this material will be processed.
Please see Note 12 (Inventories) to the Consolidated Financial Statements for
more information.
Profit for the period
Profit for the period decreased by 75% to US$220 million compared with US$871
million in 2021, reflecting a 62% decrease in operating profit, as well as a
foreign exchange gain of US$339 million compared to a foreign exchange loss of
US$38 million in 2021.
Cash flows
Operating cash flow before changes in working capital decreased by 70% to
US$434 million, while the working capital outflow in 2022 was US$20 million
(compared to an outflow of US$139 million in 2021). The overall decrease in
the working capital outflow largely reflects a balance of lower trade accounts
receivable and higher inventories and VAT receivable, and a decrease in trade
and other payables, which collectively provided a lower net effect in 2022.
As a result of lower operating cash flow, the net cash flow from operating
activities decreased by 72% to US$301 million in 2022 (2021: US$1,094
million).
With respect to capital allocation, investment decreased by 55% to US$161
million (2021: US$361 million), while dividends paid during the 2022 calendar
year decreased by 75% to 26.4 US cents compared to 105.6 US cents in 2021.
Capital investment(A)
Capital expenditure in 2022 was US$161 million compared to US$361 million in
2021. Of this amount for 2022, sustaining and modernisation capex was US$57
million (2021: US$113 million), covering activities at all of Ferrexpo's major
business units. Given operational and logistics constraints relating to
Russia's invasion of Ukraine in 2022, the Group maintained its levels of
investment relating to sustaining capital investment, and reduced activities
relating to expansion capital investment(A), particularly in relation to
projects that are expected to deliver returns in the medium to long term. As
such, major projects advanced in 2022 include US$25 million spent on stripping
activities for future production growth, US$17 million spent on the completion
of the Group's press filtration complex and US$2 million on completion of the
MFC-2 project, which will help raise pelletising capacity in the near term
once operations return to full capacity.
Ferrexpo continued to invest in the primary crushers upgrade project,
investing US$4 million. A total of US$37 million was spent on the Group's
concentrator and pelletiser as part of the Wave 1 Expansion Programme, and a
further US$4 million was invested in infrastructure facilities. The Group also
spent US$11 million in the development and exploration of the Belanovo,
Galeschynske and Northern deposits, and US$2 million in a hydrolysis plant for
the trial of hydrogen use as a fuel in the Group's pelletiser. The Group also
invested US$3 million in the procurement of new railcars in 2022. For further
information on the Group's activities to grow its business in 2022, please see
page 18.
Shareholder returns
Total dividends paid to date in respect of 2022 are 13.2 US cents (2021 total:
52.8 US cents). The Group has a shareholder returns policy outlining the
Group's intention to deliver 30% of free cash flows as dividends in respect of
a given year. To date, the Group has announced dividends in respect of the
2022 financial year representing 55% of the Group's free cash flow in 2022.
Debt and maturity profile
Ferrexpo has maintained a strong balance sheet in 2022, including low levels
of gross debt and had a net cash position as of 31 December 2022. As of 31
December 2022, the Group's net cash position was US$106 million (31 December
2021: US$117 million net cash position). The Group had no debt facilities as
of 31 December 2022, compared with US$50 million as of 31 December 2021.
The balance of cash and cash equivalents held in Ukraine amounts to US$45
million as at 31 December 2022 (31 December 2021: US$52 million). Despite the
foreign exchange control measures imposed under Martial Law in Ukraine (see
Note 30 Commitments, contingencies and legal disputes), this balance is fully
available to the Group for its operations in Ukraine and is therefore not
considered restricted.
As of 31 December 2022, the credit ratings agency Moody's had a long-term
corporate and debt rating for Ferrexpo of Caa2, with a negative outlook. The
credit ratings agency Fitch maintains a CCC+ rating on the Group. While the
credit rating of Ferrexpo is capped by the sovereign credit rating of Ukraine,
the ceilings for credit ratings ascribed to Ferrexpo by both Moody's and Fitch
are higher (one notch above sovereign, Caa3, for Moody's and three notches
above sovereign, CC, for Fitch).
During the course of 2022, as risks relating to the Russian invasion of
Ukraine escalated after 24 February 2022, the credit ratings agencies took a
number of steps to update their assessments of Ukrainian issuers. As of 14
February 2023, Moody's had a long-term corporate and debt rating for Ferrexpo
of Caa3, with a negative outlook. Similarly, as of 29 July 2022, Fitch had a
long-term corporate and debt rating for Ferrexpo plc of CCC+. Whilst the
credit rating of Ferrexpo is capped by the sovereign credit rating of Ukraine,
the credit rating ascribed to Ferrexpo by Fitch is higher. The credit ratings
agency Standard & Poor's has temporarily suspended the credit rating for
Ferrexpo plc, following an action to suspend coverage of all Ukrainian issuers
in March 2022.
Related party transactions
The Group enters into arm's length transactions with entities under the common
control of Kostyantin Zhevago and his associates. For further information,
please see Note 16 (Related party disclosures).
Breakdown of C1 costs(A) in 2022
Electricity 22%
Gas + Biofuel 19%
Fuel (including diesel) 8%
Maintenance and repairs 20%
Personnel costs 9%
Royalties and other taxes 9%
Materials 6%
Grinding bodies 6%
Blasting 2%
Note: above numbers are rounded to nearest percentage.
C1 costs(A) in 2022 increased by 49% in 2022 to US$83 per tonne, with this
increase principally related to the increasing unit cost of energy such as
natural gas, fuel (principally diesel) and electricity. This change is
demonstrated in the chart above, with energy-related costs comprising 49% of
our C1 costs(A) in 2022 (2021: 45%).
In light of the ongoing war in Ukraine, scaling back of production activities
and devaluation of the local currency in Ukraine, maintenance and repair costs
fell to 20% in 2022 (2021: 22%), and materials costs reduced to 6% in 2022
(2021: 8%). The Group's decision to continue paying its workforce despite
lower production volumes resulted in a small increase in percentage terms to
9% in 2022 (2021: 8%).
Royalties increased from 6% in 2021 to 9% in 2022 - please see page 11 for
details of the revised royalty regime that was implemented at the start of
the year.
Case Study: Factors leading to the Group recording an impairment loss
Rising risks and a depreciating local currency contribute to a lower carrying
value of assets.
Despite the Russian invasion into Ukraine on 24 February 2022, the Group
continued to operate throughout the majority of 2022, albeit at a much lower
capacity. However, the situation in Ukraine continues to represent a
significant risk to the Group's operations and the point of time of the
recovery of the production and sales volumes to pre-war levels is currently
uncertain. As a result, the Group continuously adjusts its long-term model in
order to reflect the latest developments in terms of possible production and
sales volumes as well as latest market prices and production costs, which are
adversely affected by lower production volumes. These factors, combined with a
higher discount rate to be used as a result of an increased Country Risk
Premium for Ukraine, had an adverse impact on the value in use of the Group's
non-current operating assets.
In accordance with IAS 36 Impairment of assets, the Group recorded an
impairment loss of US$254 million as of 30 June 2022 as the carrying value of
the assets was exceeding the computed value in use by this amount.
Operational Review
The Group managed to maintain production throughout the majority of 2022, and
continued shipments to customers for the entire year, despite the challenges
posed by the ongoing Russian invasion of Ukraine.
As a producer of a bulk commodity, our access to logistics is key in our
ability to produce and sell our products. As a consequence of the war in
Ukraine, our activities in 2022 were therefore appropriately scaled throughout
the year, according to the number of customers that were accessible at any
given time. Furthermore, attacks on Ukraine's state-owned electricity network
in 4Q 2022 limited our ability to produce. Shipments were, however, maintained
throughout the year, which is testament to the commitment of our operating and
marketing teams.
Health and safety
2022 represented our second successive year with no fatalities, and we
maintained our strong performance in relation to our key safety metric (lost
time injury frequency rate). Please see page 21 for more information on our
safety performance in 2022.
Reserves and resources
Ferrexpo controls licences covering a number of deposits located along the
Kremenchuk Magnetic Anomaly, which is a magnetite deposit that extends for
more than 50 kilometres. The Group has active mines on three deposits and
additional licences for deposits immediately to the north of our active
operations.
Across the Group's three active mines, we have a JORC-compliant Ore Reserve
estimate of 1.6 billion tonnes of iron ore, with an iron ("Fe") content of 32%
Fe (2021: 1.6 billion tonnes grading 32% Fe).
Our JORC-compliant Mineral Resource estimate across our three active mines is
5.7 billion tonnes of iron ore, with an iron ("Fe") content of 32% Fe (2021:
5.8 billion tonnes grading 32% Fe), which is inclusive of Ore Reserves.
In addition, at a number of exploration properties immediately north of our
active mines, we have exploration stage properties with a combined non-JORC
compliant Mineral Resource estimate of 14 billion tonnes of iron ore, grading
34% Fe (collectively referred to as the "Northern Deposits").
A table detailing the Group's JORC-compliant Ore Reserves and Mineral
Resources as at 1 January 2023 is provided on page 17 of this report.
Mining activities
Throughout the year, we have scaled our mining operations according to the ore
requirement of the processing plant, which has been set by the degree of
accessible customer markets. See page 5 for more information on the various
impacts imposed by the conflict in 2022.
Overall mining volumes across the Group saw a total movement of 55 million
tonnes across our three mines in 2022 (2021: 152 million tonnes), with this
64% decline in total movement reflective of the war in Ukraine and the 46%
decrease in sales volumes during the year.
Following the outbreak of Russia's invasion, mining activities initially
focused on both the Poltava and Yeristovo mines, with strong European demand
for iron ore, and therefore production volumes remained in line in 1Q 2022.
Subsequently, production volumes in 2Q 2022 fell by 22% as logistics
constraints increased and European steel mills curtailed buying activities
having established larger raw inventories to mitigate supply risks.
With additional logistics restrictions in 3Q 2022, principally relating to
attacks on the railway network and increased demand due to the grain season in
Ukraine, the Group further lowered its production and focused its ore mining
activities on the Yeristovo mine, to optimise mining costs.
Finally, in 4Q 2022, Russian attacks on state-owned electricity infrastructure
resulted in a lack of power at our processing plant. In response, mining
activities were paused given the lack of ore demand for production.
In light of the restrictions described above, mining tonnages at all three
mines fell by between 50% and 80% during 2022, with a lower reduction of ore
mining activities seen at both Poltava and Yeristovo mines (30-50%
reduction).
Operational performance
(000't unless otherwise stated) 2022 2021 YoY change
Production
Iron ore mined 18,837 33,764 (44%)
Strip ratio 1.9 3.5 (45%)
Iron ore processed 17,375 31,111 (44%)
Concentrate production 8,430 14,655 (42%)
Pellet production 6,053 11,220 (46%)
- Direct reduction pellets (67% Fe) 353 431 (18%)
- Premium blast furnace pellets (65% Fe) 5,700 10,790 (47%)
- Basic blast furnace pellets (62% Fe) - - -
Commercial concentrate production 124 234 (47%)
Iron ore sales
- Pellets 6,055 11,115 (46%)
- Concentrate 128 234 (45%)
- Total products sold 6,183 11,349 (46%)
Processing activities
As referenced above, processing activities were scaled according to accessible
markets throughout the year, given the ongoing war in Ukraine. As such,
processing volumes decreased by 44% during 2022 to 17 million tonnes,
reflecting the above restrictions and reduced demand for iron ore pellets as a
result of lower steel margins in Europe (being the main customer market for
the Group given restricted access to seaborne markets).
A key area of focus of the Group's processing operations in 2022 was
developing our offering of direct reduction ("DR") iron ore pellets, which is
a product that is typically used in electric arc furnaces ("EAFs"). Since an
EAF represents a more energy efficient process than the main alternative
method of steelmaking (blast furnace), DR pellets have a materially lower
Scope 3 carbon emissions footprint for the Group, whilst also generating
higher pellet premiums for us through a higher iron ore grade.
In 2022, we produced 353 kilotonnes of DR pellets, which is a decrease of 18%
on the previous year, but the proportion of total pellet output increased to
6% (2021: 4%). Through further developing our understanding of this product,
as well as using 2022 as an opportunity to establish new relationships with
potential customers, we are confident that we will emerge from the conflict in
Ukraine with a more developed footprint for global DR pellet markets.
The war in Ukraine has created delays and uncertainty over our ability to sell
our production at specific points in 2022.
To maintain the strength of our balance sheet throughout the conflict, we have
sought to avoid the creation of significant stockpiles of finished iron ore
pellets, as these capture operating costs, but do not deliver immediate
opportunities to realise revenues. However, iron ore pellets do not materially
degrade if stockpiled, and therefore it is not detrimental to the Group if
material is temporarily stockpiled.
Given fluctuations in logistics availability during 2022, the Group
accumulated a stockpile inventory of 1.0 million tonnes by the middle of 2Q
2022, with production scaled in 2H 2022 to ensure an effective drawdown of
these stockpiles. As a result, the Group ended the year with stockpiles
similar in size to the Group's stockpiles as at 31 December 2021
(approximately 0.1 million tonnes larger as of January 2023). The Group's
stockpiles are located at our operations in Ukraine or at staging points
across our logistics network, either within Ukraine or at key rehandling
locations overseas.
Growth programme
Our Wave 1 Expansion programme, which would see us increase our production
capacity by an additional three million tonnes of iron ore pellets per annum,
remains an objective of the Group. Significant investment in this programme
remains on hold whilst there are elevated risks associated with the war in
Ukraine, but it is our intention to resume activities once the risk profile of
the Group normalises.
Despite the war in Ukraine, a number of growth projects were completed or
continued in 2022. These projects principally relate to projects that were
close to completion as of February 2022, or represent low cost, high value
projects that were deemed suitable for completion during the year. Please see
page 18 for more information on growth projects completed in 2022.
Sustainability programme
We continued to implement our various sustainability initiatives throughout
2022, reducing our Scope 1 and 2 emissions footprint (combined basis) by 1%
(now 31% below our baseline year of 2019), and further increasing gender
diversity amongst our management team. Please see pages 19 to 32 for more
information on our sustainability programme.
Logistics activities
A major impact of the war in Ukraine in 2022 has been on our ability to ship
our products. Please see page 5 for a summary of the impacts incurred due to
the conflict.
The Group's logistics network covers our use of the Ukrainian railway network,
and beyond, for accessing European customers by rail. In addition, we have our
inland waterway subsidiary First-DDSG for barging material along the River
Danube. Our access to the seaborne market is typically via a berth at the
Ukrainian port of Pivdennyi (formerly known as Yuzhny), but Russia's invasion
in 2022 has limited Ukraine's access to the Black Sea. We have established
potential routes into the seaborne market via alternative ports, and we are in
advanced discussions to increase volumes of material shipped via these routes.
The logistics capacity of the Ukrainian railway network has remained under
pressure during the year as a result of (a) Russia's attacks, and (b) the
grain season in the summer of 2022, which reduced spare capacity across the
network. Furthermore, power cuts across Ukraine in 4Q 2022 placed additional
limits on the railway network's carrying capacity.
In terms of barging operations, First-DDSG's operations provided logistics
flexibility at an important time for the business, helping facilitate
shipments via an alternative logistics route.
Outlook
The Group expects that production volumes will continue to be linked to the
volume of accessible sales in 2023.
We are currently operating with two of our four pelletiser lines, with this
production predominantly being delivered to European customers. Should
Ukraine's access to the Black Sea be restored, or should we be able to
establish a port agreement that is consistent, scalable and economically
viable, then returning to the seaborne market could potentially represent a
catalyst for increasing output at our operations in the coming year. The Group
demonstrated its flexibility in logistics during the global Covid-19 pandemic,
when pellet sales to customers in China and South East Asia increased from 30%
in 2019 to 56% in 2020, as demand in other regions fell. It would be the
Group's intention to utilise this flexibility in global markets in 2023 if
regular access to seaborne markets were to resume. An additional factor is the
continued availability of the railway network in Ukraine, which is frequently
subject to attacks by Russia. Additional factors affecting the Group's access
to the railway network in Ukraine may relate to demand from other railway
users, with shifting demand patterns likely as Ukraine's economy adapts to a
complex operating environment.
Furthermore, attacks on Ukraine's state-owned electricity infrastructure have
previously impacted our ability to operate, and this is a factor that should
be monitored in 2023, should these attacks continue.
It is our intention to maintain our global inventory of finished iron ore
pellets at a stockpile level in line with previous years, but this may not be
possible given periodic fluctuations in logistics availability. Should changes
in the level of available logistics result in an increased inventory of
pellets, the Group may elect to moderate production volumes in 2023 to ensure
a stockpile drawdown, similar in scale to that seen in 2H 2022.
Given the wide range in potential logistics and production outcomes in 2023,
it is difficult to provide a clear expectation on overall production volumes
for 2023. Should, however, the conflict risks associated with the war in
Ukraine subside during 2023, then the Group would expect to return to its
nameplate capacity as soon as it is practical to do so.
JORC-Compliant Ore Reserves and Mineral Resources(1)
Proven Probable Total
JORC-compliant Ore Reserves Mt Fe Fe Mt Fe Fe Mt Fe Fe
total
magnetic
total
magnetic
total
magnetic
%
%
%
%
%
%
Gorishne-Plavninske-Lavrykivske ("GPL") 303 33 26 823 31 23 1,126 32 24
Yerystivske 211 30 25 290 33 26 501 32 26
Total 514 32 26 1,113 32 24 1,627 32 25
Measured Indicated Inferred Total
JORC-compliant Mineral Resources Mt Fe Fe Mt Fe Fe Mt Fe Fe Mt Fe Fe
total
magnetic
total
magnetic
total
magnetic
total
magnetic
%
%
%
%
%
%
%
%
Gorishne-Plavninske-Lavrykivske ("GPL") 469 35 29 1,621 30 22 744 32 24 2,834 31 24
Yerystivske 260 35 29 571 34 27 382 33 27 1,213 34 27
Bilanivske 336 31 24 1,149 31 23 217 30 21 1,702 31 23
Total 1,065 34 27 3,341 31 23 1,343 32 24 5,749 32 24
1. The Group's JORC-compliant Ore Reserves and Mineral Resources shown
above are based on an independent review completed by Bara Consulting, and are
shown on a depleted basis as of 1 January 2023. The Group previously reported
a resource estimate of 326Mt for the Galeschynske deposit, which is the
subject of a legal dispute and is therefore not shown above; please see page
71 for more information.
Case Study: Investment in Growth Projects
Newly completed press filtration complex expected to deliver a 3% reduction in
natural gas consumption(( 32 (#_ftn32) )).
In light of the ongoing war in Ukraine, we have paused our main expansion
project - the Wave 1 Expansion Programme, which amounts to more than US$600
million of total investment, growing our production capacity by approximately
25%. The Wave 1 Expansion continues to represent a significant growth project,
and we intend to resume activities once the conflict risks in Ukraine are
reduced.
The past year, however, did see a number of growth projects completed at our
Ukrainian operations. Total investment during 2022 was US$161 million, of
which US$104 million was in growth projects, and the majority of this
expenditure was on projects either nearing completion as of February 2022 or
those which represent low cost, high return opportunities.
The main project completed in 2022 is the press filtration project in our
beneficiation plant, which will help deliver more efficient removal of
moisture from concentrate as it exits the beneficiation plant. The equipment
installed includes Metso press filtration technology, which represents a
modern alternative to our existing vacuum filter system.
Benefits(1) are expected to include:
· Lower moisture levels will result in lower energy costs in the
pelletiser, where we heat pellets to cure and harden them. Consequently,
natural gas consumption rates are expected to be 3% lower on average across
all pellet types, with associated benefits for C1 costs(A) and Scope 1
greenhouse gas emissions.
· Improved product quality, since excess moisture in green (unfired)
pellets can lead to cracking as they are heated. The Cold Compression Strength
("CCS") of our pellets, which is a key metric for pellet quality, is forecast
to increase by 8% for our Ferrexpo Premium Pellets (65% Fe).
· Through more effective moisture removal, we will be able to
increase throughput of material throughout our processing plant, resulting in
3% higher throughput rates (on average).
· A more efficient process will also result in lower losses of
iron as concentrate is converted to pellets. This will result in a 0.2% Fe
uplift in pellet grades (average).
Responsible Business Review
In reviewing the past year, our engagement with local stakeholders in Ukraine
has been key to understanding our role. Companies have been essential to the
local response during Russia's invasion in 2022, supporting workforces, their
families and local communities.
At Ferrexpo, we are proud to support Ukraine. Through our local presence and
position as a long-term investor in the country, we have been able to provide
targeted support throughout the war. However, our efforts in 2022 have not
been limited to humanitarian aid, and we have continued to make good progress
in a number of areas.
As a responsible business, we understand our role in Ukraine today: supporting
our people and communities across Ukraine, and providing this support through
our experience and in-country presence. We are long-term investors in Ukraine,
its people and its economy, which is only possible through positive, long-term
partnerships with our Ukrainian stakeholders.
Our community engagement and support throughout the conflict in Ukraine has
primarily been conducted via our Ferrexpo Humanitarian Fund (see page 31 for
more details). We also have our long-standing Ferrexpo Charity Fund, which has
been providing direct support to communities for more than 11 years now. In
2022, we were also proud to publish our seventh Responsible Business Report,
which was published in both English and Ukrainian for the first time - an
important step in us broadening our engagement with our local stakeholders.
Understanding the task ahead
It is clear that the war will have a long-lasting impact on Ukraine. At this
point in time, it is important to understand the various impacts of the war on
the people and communities of Ukraine, as well as Ferrexpo. Through this
understanding, we can begin to tailor our approach to our Responsible Business
activities in the future, in particular, our efforts in respect of the health
and wellbeing of our people and local communities, as well as targeted
humanitarian support.
With this in mind, we intend to revisit our materiality assessment of
sustainability topics in the coming year, once the risks associated with the
conflict have subsided. An assessment today would likely be skewed by a need
for near-term humanitarian support, which we are already providing. With time,
there will be an opportunity to understand the longer-term needs of local
communities, and we will tailor our approach according to the results of this
work.
Safety and wellbeing
Health and safety is of paramount importance to us at Ferrexpo, and I am proud
that our operations delivered another strong year in safety. We have taken
numerous measures to protect our workforce from the threat of the conflict in
Ukraine. As the war has progressed, we have also begun providing support for
the wellbeing of our workforce, as we are conscious of the impact that living
in a war might have on an individual's mental and physical health (see page 20
for more).
Levelling up our climate reporting
Understanding our environmental footprint and reducing our greenhouse gas
emissions are key topics for modern companies. In 2022, despite the war in
Ukraine, we continued to reduce our emissions, which fell by a further 1% in
2022, and this now puts us 31% below our baseline year of 2019(( 33 (#_ftn33)
)). We also maintained our focus on developing our climate change strategy in
2022, publishing our inaugural Climate Change Report in December 2022, which
serves to summarise our first phase of work with environmental consultants
Ricardo Plc. In this report, we highlight a potential net zero pathway for our
operations, as well as providing a detailed look at various climate change
related risks and opportunities. Through this bespoke work, and our progress
in reducing emissions to date, we were also able to upgrade our Scope 1 and 2
target for 2030 to 50% (from 30%)(1) and broaden our suite of targets to
include Scope 3 emissions - setting reduction targets of 10% and 50% for 2030
and 2050 respectively(( 34 (#_ftn34) )). Our Scope 3 emissions are closely
linked to our output of direct reduction ("DR") pellets, and more can be found
on this subject in our Climate Change Report.
Building an inclusive culture
We continue to make progress in our approach to diversity. Our gender
diversity initiative - the "Fe_munity" women in leadership programme - has
recently accepted its third intake of future female leaders of our business,
and in 2022 we broadened this initiative to welcome women from across Ukraine.
To help drive change, we are also now providing grants to aid career journeys
- more on this on page 30.
Driving change and transformation is an integral part of being a sustainable
business. This can be through embedding a culture of safety at our operations,
which is now showing tangible progress, through to our approach to diversity,
equity and inclusion ("DEI"), driven by our first diversity and inclusion
officer at our operations. Looking forward, we are seeing an emerging phase of
cultural change in biodiversity, with baseline studies underway.
I am proud to be a part of Ferrexpo, having seen the good work in
sustainability being conducted in Ukraine during my most recent site visit in
late 2021. We are proud to support communities across Ukraine at this time and
look to a more positive future, when the war is over. It is a pleasure to
witness the changes underway in sustainability at Ferrexpo, and I would like
to thank everyone involved, from our workforce for their efforts to drive this
change, to our customers, investors and suppliers for their engagement on
sustainability topics.
Ann-Christin Andersen
Chair, HSEC Committee
Responsible Business: Safety and Our People
Our workforce comprises 10,000 employees and contractors; with more than 95%
of our team located in Ukraine, it is critical that we protect our workforce
from immediate dangers, but also help support their health and wellbeing at
this difficult time.
Case Study: Supporting wellbeing in a war zone
Businesses in Ukraine at the present time are playing a critical role in
supporting individuals and communities within Ukraine. As a business located
outside of the main conflict zone, Ferrexpo has been able to support more than
3,500 internally displaced people as they relocate themselves and their
families away from danger, with accommodation available at our hotels and
other properties in the local area.
For our workforce, we have provided psychological support, wellbeing classes
and on-site yoga. For communities, we have trained local teachers to help
extend our wellbeing programme to local schools, and are continuing to provide
community support via the Ferrexpo Humanitarian Fund and Ferrexpo Charity Fund
(see page 30 for more).
We are also supporting Ukrainian culture at this critical time, with
initiatives such as marking Ukraine's first Statehood Day in July, hosting a
poetry reading competition and publishing a book of employee poems to
celebrate Ukrainian Writing and Language Day in November 2022.
Protecting our people
At Ferrexpo, we have a global workforce comprising almost 10,000 employees and
contractors, with more than 95% based in Ukraine, and their safety is our
first priority. Given the scale of our workforce, it was never an option to
evacuate our people during the war in Ukraine, and therefore we have had to
take extensive measures to protect our workforce with a war unfolding.
Measures taken have included remote working for those with suitable roles, to
ensure that they were as far from the front line as possible. Measures for our
on-site workforce have included the provision of air-raid shelters, adjusting
shift patterns to align with night-time curfews and the provision of free
meals in light of disruption to supply chains in local communities. In the
early phase of the conflict, when uncertainty arose over the continued
provision of social services, the Group commenced an on-site childcare
facility for the children of employees, which was staffed by Ferrexpo
volunteers, to ensure that children could be close by and safe during such an
uncertain period of time. As the war evolved, the need for such facilities
diminished as life began to resume in Ukraine, with schools opening and a 'new
normal' beginning.
As the conflict evolved in 2022, so did our response - in 2H 2022, we focused
our efforts on the supply of key equipment such as armoured ambulances and
food packages to towns along the front line. We have also moved to provide
wellbeing initiatives to help our workforce and community as they adapt to the
stress of living in a war zone, with free psychological support.
We now have approximately 650 employees who are currently serving in the Armed
Forces of Ukraine 35 (#_ftn35) . We are proud of their efforts to defend
Ukraine, and have supported them by providing personal protective equipment
and other non-lethal equipment.
Operational safety initiatives maintained
Despite the focus on the war in Ukraine, we are proud that our operations
teams managed to record another year of excellent safety performance. In 2022,
the Group recorded a second successive year without a fatality, and the
Group's lost time injury frequency rate ("LTIFR") continues at a level
materially below both our historic average(( 36 (#_ftn36) )) and the Group's
iron ore producing peers in Western Australia(( 37 (#_ftn37) )).
As demonstrated in the table over the page, the Group's performance in lagging
indicators of safety remained largely in line with 2021 on lost time injuries
and total injury frequency rates. Near miss events saw a significant decrease,
as did significant incidents. In terms of leading indicators, the Group's
adoption of ISO 45001:2019 in 2021 resulted in increased reporting of hazards
in 2022 - demonstrating an improving culture for reporting and understanding
the safety of the working environment. Health and safety inductions and
training hours were both significantly reduced in 2022, reflecting the
indirect effects of the war in Ukraine, with a large number of our workforce
currently located off-site and lower levels of recruitment during the year.
External recognition for wellbeing programme
In January 2022, the Group learnt that it had passed a Sedex Members Ethical
Trade Audit ("SMETA") social responsibility audit, which is a study into a
company's occupational health and safety, environment, working conditions, and
suppliers' goodwill, with the Group undertaking this exercise for the first
time. In passing this audit, the independent auditor highlighted the quality
of medical care, management of social security and medical insurance provided
by Ferrexpo to its employees.
Health and safety performance (2021/2022)
2022 2021 Change
Safety indicators (lagging)
Fatalities(( 38 (#_ftn38) )) 0 0 -
Lost time injuries(1) 10 9 +11%
Lost time injury frequency rate ("LTIFR")(1) 0.51 0.41 +24%
All injuries frequency rate ("AIFR")(( 39 (#_ftn39) ))(,)(( 40 (#_ftn40) )) 0.99 0.97 +2%
Near miss events(2) 1 5 (80%)
Significant incidents(2) 8 12 (33%)
Restricted work days(2) 934 497 +88%
Severity rate (average lost days per incident)(2) 104 55 +88%
Safety indicators (leading)(2)
Health and safety inspections 5,413 3,293 +64%
Health and safety meetings 1,388 1,165 +19%
Health and safety inductions 5,332 11,602 (54%)
Training hours 6,828 11,786 (42%)
Hazard reports 740 595 +24%
High visibility management tours 157 124 +27%
Responsible Business: Environmental Stewardship
Despite the war in Ukraine, we were able to publish an upgraded suite of
carbon emissions targets following the publication of our inaugural Climate
Change Report in December 2022. Work continues in our collaboration with
environmental consultants Ricardo Plc, with a life cycle assessment to be
published in 2023.
In October 2021, we announced our collaboration with environmental consultants
Ricardo Plc, with work completed to date summarised in our first standalone
Climate Change Report, which was published in December 2022.
Details of this work are provided in this section, and as part of this bespoke
piece of work, we were able to present a potential net zero pathway for us to
achieve our carbon emissions goals for 2050 (covering all emissions except
Scope 3 emissions from steelmaking). The pathway developed shows a potential
route to reduce absolute emissions of carbon dioxide by 92%, despite a
projected 100% increase in output of iron ore pellets in the same timeframe.
To achieve this pathway, we intend to investigate a number of key modern
technologies across our operations, to minimise our consumption in three key
areas: diesel (predominantly in mining), electricity (processing) and natural
gas (pelletising). These three aspects of our business collectively accounted
for 77% of Scope 1 emissions and 100% of Scope 2 emissions in 2022. Shown
below are a number of the technologies we intend to investigate to help reduce
our emissions and achieve our net zero ambitions.
· Battery technology;
· Trolley-assist technology;
· Biofuels (sunflower husks);
· Clean power purchasing;
· Renewable energy; and
· Direct reduction ("DR") pellets.
Climate Change Report published
Following the Group's announcement of our collaboration with environmental
consultants Ricardo Plc, and work throughout 2022, the Group was able to
publish its inaugural standalone Climate Change Report in December 2022. In
this report, we cover climate change related legislation that is being enacted
in the various jurisdictions into which we sell our products, and the risks
and opportunities that these changes may present to our business model.
Through this work, it is clear that legislative change is fastest in the
European Union ("EU"), with an established emissions trading scheme setting
€98 per tonne of CO(2) as the price of carbon emissions within the region as
of early 2023(( 41 (#_ftn41) )). The EU's Carbon Border Adjustment Mechanism,
due to begin its implementation phase in 2025, will result in significant, far
reaching effects, well beyond the borders of the EU. Further details of this
legislation are provided on page 17 of our Climate Change Report (available at
www.ferrexpo.com).
A second area of focus in the Climate Change Report looks at the risks and
opportunities relating to climate change that are specific to Ferrexpo, and
these are summarised in the Task Force on Climate-related Financial
Disclosures ("TCFD") on page 24 of this report.
Our Climate Change Report also presents a potential net zero pathway for
decarbonisation, highlighting the technologies required and timing of
investments, to achieve net zero iron ore pellet production by 2050. Through
this work, we have established an estimated capital cost of US$3.3 billion and
a carbon abatement cost of US$145 per tonne. The Group is able to have a
relatively low carbon abatement cost due to the timing of capital expenditures
for decarbonisation at its operations. Since more than 80% of the estimated
capital cost of decarbonisation relates to the implementation of green
hydrogen in our pelletiser and our own renewables power, both of which are
projects that are predominantly implemented after 2030, and therefore the net
present value of this capital investment(A) is reduced due to its timing. In
the meantime, we are fortunate to be able to rely on clean power sourced
directly from the Ukrainian grid, as we have been able to selectively purchase
low carbon forms of electricity since 2019.
Carbon targets upgraded
Through the work to develop our decarbonisation pathway that was completed as
part of our Climate Change Report, we were able to announce updated and
expanded carbon emissions reduction targets in December 2022. Following the
success seen across 2019 and 2020, with Ferrexpo reducing its Scope 1 and 2
emissions footprint by 30% over this period, we were able to announce an
increase to our 2030 goal, and we are now targeting a 50% reduction in this
timeframe.(( 42 (#_ftn42) )) Through greater understanding of our Scope 3
emissions, we have also been able to introduce targets for this category, and
are now targeting a 10% reduction by 2030(( 43 (#_ftn43) )).
Scope 1 ("S1")(1) Scope 2 ("S2")(1) Subtotal Scope 3 ("S3")(2)
emissions
emissions
(S1+S2)(1)
emissions
Our performance in 2022
(3%) +2% (1%) (1%)
Our performance since benchmark year (2019-2022 inclusive)
(1%) (52%) (31%) (3%)
Our medium-term goals (2030)
(50%) (10%)
Our long-term goals (2050)
Net (50%)
zero
A list of definitions for each Scope of carbon emissions is provided on page
40 of the Climate Change Report.
Scope 1 emissions
Our Scope 1 (direct) emissions principally relate to three activities at our
operations - diesel consumption (primarily used in mining activities), natural
gas (primarily used in pelletising activities) and gasoil (primarily used in
inland waterway logistics activities). Collectively, these three sources of
emissions represented 97% of Scope 1 emissions in 2022 (2021: 98%). In
addition, we track a further 15 sources of Scope 1 emissions across our
operations, ensuring that multiple aspects of our operations are covered in
our emissions estimates.
Absolute Scope 1 emissions fell by 48% in 2022, reflecting the reduced level
of production as a result of the war. Despite the conflict, we managed to
reduce our emissions on a per unit of production basis by 3%, which reflects a
reduction of stripping activities in the Group's mines and increased biofuel
consumption in the pelletiser.
In line with data for 2021, our calculations of our Scope 1 and Scope 2
emissions have been independently assured for a second successive year, with
this work aimed at providing additional confidence in our climate change
reporting. Please see below for more information.
Scope 2 emissions
Our Scope 2 (indirect) emissions relate exclusively to our purchasing of
electricity from third parties, with electricity predominantly used in our
concentrator(( 44 (#_ftn44) )). On an absolute basis, this category of
emissions fell by 45%, in line with the lower level of production seen in 2022
due to the war in Ukraine. On a unit basis, Scope 2 emissions rose by 2%,
reflecting the impact of the war in Ukraine and associated power outages in 4Q
2022, in addition to the increased output of direct reduction pellets, which
require additional processing compared to blast furnace pellets.
Scope 3 emissions
For Ferrexpo, this category of emissions primarily relates to the type of iron
ore pellet produced, since the downstream processing of iron ore accounted for
95% of Scope 3 emissions in 2022. Through increasing the output of direct
reduction ("DR") pellets to 6% of total pellet production (2021: 4%), we have
seen a reduction in Scope 3 emissions on a unit basis by 3% since 2019, with
DR pellets carrying a 49% lower carbon footprint than blast furnace
pellets(( 45 (#_ftn45) )).
Independent assurance
In line with the process completed for 2021, the Group has completed an
independent assurance process for its Scope 1 and Scope 2 carbon emissions for
2022 (in addition to key safety metrics). For more information, please see the
Limited Assurance Report, which is provided alongside the Group's full year
financial results.
Our Scope 3 emissions are not yet independently assured, with an expansion of
the remit of the independent assurance process to include this category
expected to represent the next phase of this process.
Greenhouse gas emissions footprint and energy consumption (2021/2022)
2022 Data (% change to 2021) 2021 Data
Absolute basis (kilotonnes CO(2)e, unless stated) Unit basis Absolute basis (kilotonnes CO(2)e, unless stated) Unit basis
(kg CO(2)e per tonne)
(kg CO(2)e per tonne)
Scope 1 emissions 341 (-48%) 55 (-3%) 649 57
Scope 2 emissions 223 (-45%) 36 (+2%) 404 35
Subtotal (S1+S2) emissions 564 (-46%) 91 (-1%) 1,053 92
Scope 3 emissions 7,642 (-47%) 1,237 (-1%) 14,362 1,254
Total emissions 8,206 (-47%) 1,329 (-1%) 15,415 1,346
Biofuels emissions (reported separately) 6 (-37%) 1 (+18%) 10 1
Energy consumption (kWh) 3,052,942,993 (-44%) - 5,489,232,550 -
Methodology
Ferrexpo's methodology for calculating its GHG emissions footprint utilises,
where possible, emissions factors provided by the Greenhouse Gas Protocol,
which is in line with reporting requirements under the Global Reporting
Initiative's ("GRI") framework for reporting sustainability topics. Through
using carbon factors provided by the Greenhouse Gas Protocol, the Group is
able to provide carbon dioxide-equivalent emissions figures ("CO(2)e") that
also account for emissions of both methane (CH(4)) and nitrogen oxide (N(2)O).
Water
We operate in an environment where we have multiple interactions with the
water cycle, from the water ingress into our mines, to recycling water in our
processing operations, to the River Dnipro, which is located next to our
operations. Testing of water quality has continued throughout 2022, despite
the war in Ukraine, with any discharged water quality tested across more than
12 different chemical elements or attributes.
In our processing plant, where water is utilised in the processing of iron
ore, we once again recycled 98% of process water (2021: 98%). We are currently
reviewing the possibility of removing water prior to pumping material to our
tailings dam, which would have the advantage of reducing water consumption as
well as energy use, with operations needing to pump a significantly lower mass
of material to our tailings dam if tailings are dry stacked. It is estimated
that water consumption in the processing plant would decline by up to 20%
through the use of this technology.
Waste generation
The Group generates waste in the form of solid waste in its mining operations
(overburden in the form of waste rock and sand), as well as emissions of other
gases and dust from our mines and processing operations.
Waste removal in our mines declined by 70% in 2022, which is as a result of
the war in Ukraine and lower production volumes (see page 5 for more details
of the war's impact on our business in 2022). Overburden and waste removed
from our mining operations is non-hazardous and is stored in on-site waste
dumps designed by our mine planning department.
Aside from greenhouse gases, gaseous emissions include those emitted from our
processing operations (NO(2), SO(2), and CO), with emissions from such sources
declining by 50-60% during the year, in line with mining volumes. A range of
projects related to dust suppression in our processing complex were completed
in 2022, resulting in dust emissions falling by 62%, which represents a level
ahead of the production decrease seen in 2022 (46% decrease).
Elsewhere in our operations, we expanded our domestic waste recycling
programme to include additional operating subsidiaries in Ukraine (FYM, FBM
and Ferrostroy), with collection bins and sorting facilities launched in 2022.
All four of our main operating subsidiaries in Ukraine now have active
recycling programmes, and the focus for 2023 will be encouraging cultural
change to increase recycling rates throughout our business.
ISO-certified systems
Ferrexpo now has an ISO-compliant environment management system (ISO
14001:2015) at both FPM and FBM, with the latter achieving accreditation
during 2022. This is in addition to accreditation of our Energy Management
System (ISO 50001:2018) at the same two subsidiaries, with FBM also acquiring
this accreditation in 2022.
Biodiversity baseline expanded
Despite the pressures imposed due to the war in Ukraine, our Environmental
Department in Ukraine continues to make good progress on a range of
initiatives at our operations, including an update to the Zoo-biota
interactive map identifying species of animals in the vicinity of our
operations, including 58 of more than 500 species listed in the Red Book of
Ukraine. Furthermore, work was completed in 2022 on a second interactive map,
covering species of plants located in the vicinity of our operations
(including 24 out of 410 species in the Red Book of Ukraine).
Climate change: reporting journey
The Transition Pathway Initiative Global Climate Transition Centre ("TPI
Centre", www.transitionpathwayinitiative.org/) is an independent,
authoritative source of research and data on the progress of the financial and
corporate world in transitioning to a low carbon economy. The TPI Centre
publishes a "Management Quality Staircase"(( 46 (#_ftn46) )) that allows
companies and stakeholders to map their progress in terms of climate
governance maturity against five levels, as shown in the table below.
Following the publication of our Climate Change Report and Scope 3 targets in
December 2022, in addition to independent assurance work completed in July
2022, we have assessed our progress to have reached Level 4 of reporting. The
TPI Centre's Staircase is particularly helpful for understanding the
forward-looking component of our reporting journey that lies ahead, and
highlights a need for us to develop our understanding of the impact of climate
change on our business costs as an area of focus for future work.
Responsible Business: TCFD Disclosures
Recognising the need to provide reliable information on climate-related risks,
opportunities and issues, and preparing disclosures throughout the year,
including reporting informed by the recommendations and recommended
disclosures produced by the TCFD.
Table: TPI Centre's Management Quality Staircase
Level 0 Level 1 Level 2 Level 3 Level 4
Unaware
Awareness Building capacity Integrated into operational decision-making Strategic assessment
Does not recognise climate change as a significant issue for the business Explicitly recognises climate change as a significant issue for the business Has set energy efficiency Company has nominated Company has reduced its Scope 1 & 2 GHG emissions over the past 3 years
(relative or absolute) GHG emissions reduction targets
a board member or committee with explicit responsibility for oversight of the
Has a policy commitment
climate change policy Company provides
to action on climate change Has published information on its Scope 1 & 2 GHG emissions
information on its business costs associated with
Company has set quantitative targets for reducing Scope 1
climate change
& 2 GHG emissions (relative
or absolute) Company has set long-term quantitative targets (>5 years) for reducing its
GHG emissions
Company reports on
its Scope 3 emissions Company has incorporated ESG issues into executive remuneration
Has had its Scope 1 & 2
GHG emissions data verified
Company supports domestic and international efforts to mitigate climate change
Compliance Statement (FCA's Listing Rule 9.8.6(8)R)
For the purposes of Listing Rule 9.8.6R(8), Ferrexpo considers that it has
made climate-related financial disclosures consistent with the four TCFD
recommendations and 11 TCFD recommended disclosures save in relation to the
following areas, where full compliance remains a work in progress:
· Strategy Recommended Disclosure c) (strategic and organisational
resilience).
In developing the Group's approach to climate-related risks, we intend to
perform in-depth financial analysis of our operations' exposure to such risks
to determine operational and strategic resilience once baseline studies have
been completed. It is expected that future phases of work, which will lead
into this financial modelling, will require site visits to our operations in
Ukraine, which are not possible at the current time. We will provide further
updates on this work stream in due course.
In determining this, we have taken into account the TCFD's Guidance for All
Sectors and Supplemental Guidance for Non-Financial Groups, as well as other
relevant materials. This assessment reflects the progress that Ferrexpo has
made on its climate-related reporting over the course of the year, as well as
those areas where full compliance with the TCFD's recommended disclosures (and
some aspects of the related guidance) forms part of our ongoing work streams.
The following recommended disclosures are set out in our Climate Change Report
2022 (published in December 2022), which is available on the Group's website
at www.ferrexpo.com/investors/results-reports-and-presentations
(http://www.ferrexpo.com/investors/results-reports-and-presentations) :
· Governance Recommended Disclosure a) (Board oversight of
climate-related risks and opportunities) - see page 11.
· Governance Recommended Disclosure b) (management's role in
assessing and managing climate-related risks and opportunities) - see pages 11
and 12.
· Strategy Recommended Disclosure a) (description of climate-related
risks and opportunities identified over the short, medium and long term) - see
pages 14 to 37.
· Strategy Recommended Disclosure b) (impact of climate-related risks
and opportunities on the organisation's businesses, strategy and financial
planning) - see pages 20 to 21 and 28 to 37.
· Risk Management Recommended Disclosure a) (processes for
identifying and assessing climate-related risks) - see pages 14 to 37.
· Risk Management Recommended Disclosure b) (processes for managing
climate-related risks) - see pages 20 to 21 and 28 to 37.
· Metrics and Targets Recommended Disclosure a) (metrics used by the
organisation to assess climate-related risks and opportunities) - see pages 8
and 42.
· Metrics and Targets Recommended Disclosure b) (Scope 1, 2 and 3
emissions disclosures) - see pages 8 to 10.
We have set out these recommended disclosures in this separate report to
enable us to provide information for interested stakeholders in the context of
our wider work on mapping the Group's carbon footprint and exposure to
climate-related risks and opportunities, alongside details of the next steps
we are taking.
The following recommended disclosures are set out in our Responsible Business
Report 2021 (published August 2022), which is available on the Group's website
at www.ferrexpo.com/investors/results-reports-and-presentations/
(http://www.ferrexpo.com/investors/results-reports-and-presentations/) :
· Governance Recommended Disclosure b) (management's role in
assessing and managing climate-related risks and opportunities) - see pages 77
to 81.
· Strategy Recommended Disclosure a) (description of climate-related
risks and opportunities identified over the short, medium and long term) - see
pages 77 to 81.
· Strategy Recommended Disclosure b) (impact of climate-related risks
and opportunities on the organisation's businesses, strategy and financial
planning) - see pages 77 to 81.
· Risk Management Recommended Disclosure a) (processes for
identifying and assessing climate-related risks) - see pages 77 to 81.
· Risk Management Recommended Disclosure b) (processes for managing
climate-related risks) - see pages 77 to 81.
· Risk Management Recommended Disclosure c) (identifying, assessing,
and managing climate-related risks are integrated into the organisation's
overall risk management) - see page 48.
· Metrics and Targets Recommended Disclosure a) (metrics used by the
organisation to assess climate-related risks and opportunities) - page 43.
· Metrics and Targets Recommended Disclosure b) (Scope 1, 2 and 3
emissions disclosures) - page 43.
We have set out these recommended disclosures in this separate report to
enable us to provide in more granular detail an overview of the various
physical and transition risks the Group is facing, the time horizons over
which these may emerge, their financial implications and our risk mitigation
efforts.
Scenario analysis selection
In undertaking our modelling exercise, climate scenarios were selected on the
basis of giving a range of outcomes (rate of environmental change and
severity of change) as a result of different levels of legislative ambition
taken by governments in the coming years. Scenarios were also selected on the
basis of being produced by a range of reputable independent authorities on
climate change.
1. International Energy Agency ("IEA") Sustainable Development Scenario 2. IEA Stated Policies Scenario ("STEPS") 3. IPCC Shared Socioeconomic Pathway 4 ("SSP4")
("SDS")
Description: a "well below" 2°C scenario, achieved through policies that Description: a worst case, "business as usual scenario" (one of two modelled Description: a worst case, "business as usual scenario" (one of two modelled
adhere to here). A more conservative benchmark whereby governments are assumed to not here). Divided approach to climate change continues to widen through unequal
the Paris Agreement. reach all announced goals. investments in human capital.
Summary: Summary: Summary:
This path sets out a plausible path to concurrently achieve universal access The STEPS scenario provides a more conservative benchmark for the future, Inequality (A Road Divided). Highly unequal investments in human capital,
to energy, the objectives of the Paris Agreement, and a reduction in air because it does not take it for granted that governments will reach all combined with increasing disparities in economic opportunity and political
pollution. announced goals. Instead, it takes a more granular, sector-by-sector look at power, lead to increasing inequalities and stratification both across and
what has actually been put in place to reach these and other energy-related within countries.
objectives, taking account not just of existing policies and measures, but
also a look at those that are under development.
Characteristics: Characteristics: Characteristics:
- A well below 2°C pathway. - Sector-by-sector look at what has actually been put in place - A gap widens between an internationally connected society that
to reach goals and other energy-related objectives. contributes to knowledge and capital intensive sectors of the global economy,
- Surge in clean energy policies and green investment.
and a fragmented collection of lower income, poorly educated societies that
- Takes into account not just existing policies and measures but work in a labour intensive, low-tech economy.
- All existing net zero pledges achieved in full. also those under development.
- Social cohesion degrades, and conflict and unrest become
- Extensive efforts to realise near-term emissions reductions. - Includes "Fit for 55" measures announced by the European Commission increasingly common.
in July 2021 (55% reduction in emissions by 2030 compared with 1990 baseline).
- Number of western economies to reach net zero emissions by - Technology development is high in the high-tech economy and
2050, China by 2060, and a number of other countries by 2070 latest. sectors.
- In alignment with the United Nations Sustainable Development - Globally connected energy sector diversifies, with investments
Goals. in both intensive fuels like coal and unconventional oil, but also low carbon
sources.
Source: Ricardo Plc.
Scenario metric IEA SDS (Sustainable Development Scenario) IEA STEPS (Stated Policies Scenario) IPCC SSP4 (Shared Socioeconomic Pathway 4)
Average global temperature increase (°C) by 2050 1.7°C (▼) 2.0°C (◄►) 2.2°C (▲)
Average global temperature increase (°C) by 2100 1.6°C (▼) 2.6°C (◄►) 3.7°C (▲)
Policy intervention Increased policy beyond what has already been committed to, from 2021 (▲) Only policies that are active in 2021, including what has been committed to Increased policy after 2030, demonstrating a rapid transition to
and what has been proposed (◄►) decarbonisation (◄►)
Time horizon Present day to 2100 Present day to 2100 Present day to 2100
Transition risks HIGH (▲) MEDIUM (◄►) MEDIUM (◄►)
(as a function of carbon price, with pricing correct as of studies completed
in June 2022) (US$95/t) in 2050 (US$90/t) in 2050 Regional carbon price in the short term, global carbon price in the long term
Global carbon price
Global carbon price
Orderly or disorderly transition Orderly (▼) Potential for orderly or disorderly Disorderly (▲)
Legend for above table: Symbols denote the potential overall impact on
Ferrexpo (determined via stakeholder interviews and desktop studies,
categorised on basis of occurrence and likelihood, see risk matrix on page 27
of the Group's Climate Change Report).
(▼) Denotes risk factors that are deemed low risk to Ferrexpo. (◄►) Denotes risk factors that are deemed medium risk to Ferrexpo. (▲) Denotes risk factors that are deemed high risk to Ferrexpo.
Material topics
(Note: √ denotes key focus area for Ferrexpo.)
External factor Key focus area?
Market and technology shift
Increasing demand for low carbon emissions steelmaking √
Movement towards circular economy principles √
Mineral commodity shift: From iron ore to other minerals
Policy and legal
Shipping: Targets and regulations on carbon emissions √
Carbon pricing/tax: Targets and regulations on carbon emissions √
Energy crisis in Ukraine √
Reporting: Targets and regulations on carbon emissions
Increase in insurance costs
Reputation
Increased consumer and investor climate consciousness √
Climate action transparency: Increased demand from consumer and investors
Physical risks
Water stress (chronic)
Sea level rise (chronic) √
Increase in storm intensity (acute) √
Climate-induced conflict √
Surface temperature rise
Opportunity for increased community and host country engagement over climate
change related issues
Code Issue area Matrix score Top risk areas identified
CC Climate-induced conflict LOW
CEP Movement towards circular economy principles LOW
CP Carbon pricing/tax: Targets and regulations on carbon emissions LOW/ MEDIUM #3
CPU Energy crisis in Ukraine MEDIUM
IIC Increase in consumer and investor climate consciousness LOW/ MEDIUM
LCS Demand for low carbon emissions steelmaking HIGH #1
SCE Shipping: Targets and regulations on carbon emissions MEDIUM/ HIGH #2
SI Increase in storm intensity (acute) MEDIUM
SR Sea level rise (chronic) LOW
The information on the previous page is taken from the work completed in our
collaboration with environmental consultants Ricardo Plc, with a full summary
provided in our inaugural Climate Change Report, which was published in
December 2022 and is available on the Group's website (www.ferrexpo.com). The
results presented above emerged from the scenario analysis described on pages
22 to 37 of this report.
As shown above, the top three risk areas identified are (1) low carbon steel
(risk relating to market and technology shift), (2) shipping targets and
regulations (policy and legal risk), and (3) carbon pricing and tax (also a
policy and legal risk).
In respect of low carbon steel, we have commenced a process to produce greater
volumes of direct reduction ("DR") pellets, which are a higher grade form of
iron ore and are a known technological pathway to low emissions Green Steel
(via the electric arc furnace method of steelmaking). Independent research
shows that Ferrexpo's DR pellets have a 49% lower greenhouse gas emissions
footprint than our blast furnace pellets, and therefore offer us a substantial
Scope 3 emissions saving(( 47 (#_ftn47) )).
In respect of efforts to understand potential climate change related risks for
the other key risk areas (shipping targets and regulations and carbon
pricing), please see pages 31 and 32 of our Climate Change Report.
In terms of next steps with regard to climate change reporting, we are
currently finalising a life cycle assessment of iron ore pellets, which will
be a peer-reviewed study into the environmental emissions footprint of iron
ore pellets during their entire life cycle, benchmarked against the most
commonly traded form of iron ore (sinter fines). In order to capture the
emissions generated through converting iron ore to steel, which account for
more than 89% of our total emissions in 2022 (2021: 89%), this study will look
at the footprint of iron ore from mining through to steel production, and will
therefore cover the different emissions footprints of blast furnace and
electric arc furnace steelmaking. This report is expected to be available in
the first half of 2023.
Summary disclosure against TCFD recommendations
Strategy
Climate-related risks and opportunities over the short, medium and long term Climate change is considered to be a Principal Risk to the Group, and this
risk is detailed on page 48 of this report, alongside risk mitigation actions.
A description of the specific climate-related issues potentially arising in
the short, medium and long term that could have a material financial impact on
the Group is included on pages 22-37 of the Group's Climate Change Report,
available at http://www.ferrexpo.com (http://www.ferrexpo.com) . These include
transition risks and physical risks associated with the transition to a lower
carbon economy. The time horizons for these risks and opportunities to emerge
are also described being short-term (less than two years), medium-term (more
than two but less than ten years) or long-term (greater than ten years). The
definition of each time horizon is broadly aligned to the Group's medium-term
climate change targets for 2030, with a ten-year window for action following
the Group's baseline year, with short-term and long-term horizons set at
either side of this definition. The Group's risk identification process is
described on pages 33 to 34 of this report.
Impact on the Ferrexpo business, strategy and financial planning Consideration of topics relating to climate change is a fundamental aspect of
Ferrexpo's business model, with the Group releasing a standalone report on
climate change in December 2022. Through the recent work completed with
environmental consultants Ricardo Plc, the Group was able to upgrade and
broaden its suite of carbon emissions reduction targets. The Group has a clear
understanding of the likely technologies to help meet these targets, and these
are shown on page 21 of this report. Climate-related risks and opportunities
have directed the Group to increase its focus on direct reduction pellets,
which have a lower emissions footprint and represent a pathway to low
emissions steelmaking. In producing the Group's products, Ferrexpo is seeking
to research and implement new technologies that will lower the Scope 1 and 2
emissions footprint of the Group's products, with the Group's solar power
pilot plant to trial renewable power generation, and plans to build a
hydrolysis plant to trial the use of hydrogen as a fuel in the Group's
pelletiser as examples of such activities. A summary of potential
technological pathways to lower emissions pellet production is provided on
page 21 of this report. Climate-related issues input into financial planning
processes through the consideration of the potential carbon emissions
footprint of existing and proposed operating projects and capital
investment(A) projects. Given the current war in Ukraine and reduced level of
operating activities in Ukraine, the Group is currently not assessing new
operational or capital investment(A) projects. Following a reduction in the
risks associated with the war in Ukraine, it is expected that new investments
will be assessed using a price of carbon that is reflective of the prevailing
carbon price within the EU Emissions Trading System, as was the case prior to
the war in Ukraine. Climate-related factors are expected to negatively impact
financial performance in the short to medium term (operating costs and
increased capital investment(A)), but present opportunities in the long term
through the expected rise in demand for iron ore products that are relevant
for low emissions steelmaking (Green Steel).
Resilience based on climate change scenarios The Group has included an analysis of climate change scenarios, which was
conducted by environmental consultants Ricardo Plc as part of the work
completed for the Group's Climate Change Report described in further detail on
page 21. The Group intends to perform in-depth financial analysis of our
operations' exposure to such risks to determine operational and strategic
resilience once baseline studies have been completed. It is expected that
future phases of work will require site visits to our operations in Ukraine,
which are not possible at the current time. The Group will provide further
updates on this work stream in due course.
Governance
The Board's role in oversight of climate-related risks and opportunities The Board of Directors has ultimate oversight of the Group's strategy,
including its approach to the effect of climate change on the Group's business
model. Climate change was a standing agenda item at all five scheduled Board
meetings throughout the year. Further details of the Board's consideration of
climate change and its oversight of the Group's goals and targets for
addressing climate-related issues are on pages 34 and 35. The HSEC Committee
has been delegated management of climate-related issues, which includes three
members of the executive management team, and reports the Group's progress on
climate change related matters to the Board of Directors. Independent
Non-executive Director Ann-Christin Andersen is the Director primarily
responsible for climate-related matters and Chair of the HSEC Committee, which
met four times during the year (2021: four) and climate change has been a
standing agenda item at all scheduled HSEC Committee meetings throughout the
year.
Management's role in assessing risks and opportunities In addition to the role of the Health, Safety, Environment and Community
("HSEC") Committee described above, the Group's executive management team
monitors and assesses climate-related risks through its risk monitoring
activities as part of the Group's Finance, Risk Management and Compliance
Committee, which met ten times in 2022 (2021: ten). The Group's process for
risk monitoring is described on page 33. The HSEC Committee receives
information about climate-related issues through activities such as internal
briefings by members of the executive management team and briefings from
external advisors. Feedback from this Committee is provided to the Board on a
regular basis.
Risk management
Processes for identifying and assessing climate-related risks The Group regularly assesses risks applicable to the Group through its
Finance, Risk Management and Compliance Committee, which assesses risks based
on the probability of occurrence and severity of impact should an event occur.
An overview of the Principal Risks facing the Group, and the risk mitigation
measures that the Group has put in place in relation to these, is provided on
pages 34 to 49, with climate change identified as a Principal Risk and
detailed on page 48 of this report. Within the topic of climate change, the
Group's management has identified specific risks and opportunities relating to
climate change, ranging from policy and legal topics, physical effects,
emerging technologies, market factors and reputational differentiators.
Managing climate-related risks The Group's approach to managing and mitigating risks, including
climate-related risks, is provided in the Principal Risks section, on page 48
of this report. Risks, including climate-related risks, are prioritised
according to their assessment under the Group's materiality matrix.
How Ferrexpo integrates these risks into the Group's overall risk management Ferrexpo's governance relating to climate change risks has been designed to
ensure that the management of the financial risks from climate change are
integrated across the whole governance system and embedded into the existing
risk management framework. The Group's approach to assessing and managing
risk, including climate-related risks, is described on page 48. Risks relating
to climate change are determined in the same way as other principal and
emerging risks, and the relative significance of climate risks is assessed
based on monetary impact, probability, maximum foreseeable loss, trend and
mitigating actions. A summary of the Group's approach to risk identification
and risk mitigation activities is provided on pages 34 to 49 of this report.
Metrics and targets
Metrics used to assess climate-related risks and opportunities The Group uses a wide range of climate-related metrics including GHG emissions
(Scopes 1, 2 and 3 and emissions intensity), as well as consumption of diesel,
electricity and natural gas - see further on pages 22 and 23. Metrics relating
to carbon reduction progress are incorporated into remuneration policies.
Greenhouse gas emissions Details of the Group's Scope 1, 2 and 3 emissions are provided on page 23 of
this report.
Targets Our carbon emissions reduction targets are summarised on page 22 of this
report.
Responsible Business: Diversity, equity and inclusion
Ferrexpo has initiated a number of diversity, equity and inclusion ("DEI")
initiatives, which help us to form a baseline understanding of our workforce
composition and to shape DEI efforts.
Ferrexpo's diversity initiatives are focused on helping us to develop a modern
business with a diverse workforce and an inclusive working environment. Our
efforts in DEI have increased significantly in recent years, with increased
stakeholder focus and a greater focus on companies having a sustainable,
inclusive culture. Our DEI efforts have continued in 2022, despite the war in
Ukraine, as DEI helps to generate a positive working environment that supports
people's mental health and wellbeing, regardless of age, gender or other
characteristics.
Progress continues to accelerate following the appointment of our first DEI
officer in Ukraine in 2021, and we are continuing to gain a better
understanding of our workforce and corporate culture.
DEI progress in 2022
In 2022, we made significant progress in advancing our strategy to implement a
360-degree approach to DEI. Further to the Group's Diversity, Equity and
Inclusion Policy that was established in 2019, our local operating entities
adopted a policy to further define and understand definitions and behavioural
patterns for fostering a more inclusive working environment. This policy is
designed to prohibit all forms of discrimination (on the basis of disability,
pregnancy and parenthood, race, national or ethnic origin, age, gender, sexual
orientation, political opinion, and social origin). As part of this policy, we
now have an internal mechanism for addressing DEI-related concerns and
resolving potential incidents of discrimination.
In February 2022, Ferrexpo hosted an event as part of the United Nations'
"HeForShe" movement, which is aimed at providing solidarity amongst the male
population for gender diversity initiatives. More than three million men
around the world signed declarations of support, with 135 Ferrexpo employees
taking part at a mass-participation event. Through their participation,
Ferrexpo aims to raise awareness of gender diversity topics and help to fight
discrimination.
Our Inclusion School, which is a training programme for our employees in
Ukraine, began in 2021, and restarted in late 2022. Topics covered in this
programme are aimed at fostering inclusiveness and diversity, and how this can
help Ferrexpo's business model. More than 200 of Ferrexpo's employees
completed this course in 4Q 2022. Online learning covers topics such as
identifying different forms of discrimination, why it is important to
eliminate prejudice and how tolerance can help Ukraine to tackle its wartime
challenges. Similarly, the expansion of our "Fe_munity" programme in 2022 (see
Case Study opposite), our Inclusion School was also extended during 2022 to
include local authority employees who are keen to learn more about challenging
prejudice and discrimination.
Additionally, through the Ukrainian translation of the Group's 2021
Responsible Business Report, we have been able to communicate our recent
progress in DEI to a broader audience within Ukraine - this report is
available on our website at:
www.ferrexpo.com/investors/results-reports-and-presentations/
(http://www.ferrexpo.com/investors/results-reports-and-presentations/) .
Gender diversity targets for 2030
At Ferrexpo, we have a gender diversity target of ensuring 25% of managerial
roles are filled by women by 2030. To date, our diversity efforts have enabled
us to progress the level of women in management roles from 18% in 2019 to 21%
in 2022, which has been possible through a range of diversity initiatives in
Ukraine and across the Group, as well as sustainability-linked incentives
within the Group's remuneration policy.
We are specifically targeting diversity at the managerial level, rather than
total diversity, as this helps to encourage career progression and
opportunities for women, which may not otherwise be available. Our workforce
does, however, include a higher proportion of women (2022: 29%) than our
mining-sector peers that operate in the developing world(( 48 (#_ftn48) )).
Women's Empowerment Principles
As part of our DEI implementation plan, Ferrexpo became a signatory to the
Women's Empowerment Principles ("WEPs") in October 2022, which is a United
Nations-supported initiative for business leaders to express support for
advancing gender equality. In undertaking WEPs' Gender Gap Analysis Tool in
2022, Ferrexpo achieved a rank of "Leader" within this framework, with this
assessment made on the basis of existing policies and our approach to 18
different aspects of DEI, including: addressing the gender pay gap, parental
leave and initiatives to create a working environment free from violence,
harassment and sexual exploitation.
External recognition in 2022
Our DEI efforts are not going unnoticed, with external recognition of the
forward thinking that Ferrexpo is introducing to its business.
In October 2022, the Group was ranked in the top ten of employers in Ukraine
for diversity, equity and inclusion by the Ukrainian Corporate Equality Index,
which is a national survey of corporate policies, rules and practices of
private companies to prohibit discrimination in the workplace.
Diversity inclusion
As a large company operating within Ukraine, we are subject to a local
requirement for the employment of our people to include a minimum of 4% as
those with a registered disability, which is a requirement that continues to
be met through our employment of 321 individuals with disabilities in 2022 (4%
of employee workforce). The majority of these individuals are located at our
operations in central Ukraine, working at FPM and FYM.
Recently, we have published case studies celebrating the contribution of those
with disabilities at our operations on our social media channels, including
individuals working in our social services department, mining department and
in the local museum, which we support through our Charity Fund. We also
sponsor disabled athletes to help promote healthy lifestyles, and have
previously sponsored individuals to attend World Championship canoeing events.
Case Study: DEI initiative expands in 2022
Our "Fe_munity" women in leadership programme expanded in 2022 to include
women from across Ukraine.
The "Fe_munity" programme commenced in 2020 and over the course of three
intakes of participants, has helped to form an integral aspect of our efforts
to meet our goal of reaching 25% of managerial positions held by women by
2030.
Given the events of 2022, the Group was made aware of a need to support the
careers of women across Ukraine, and we decided to open up enrolment into our
"Fe_munity" programme to all participants, irrespective of the sector in which
they work. In September 2022, the FEMUNITY.UA project hosted 50 female
participants from all over Ukraine, with lectures over three months, led by
eight guest speakers and 32 mentors.
In addition, "Progression Grants" are now being offered to participants to
help accelerate their learning and career development.
Responsible Business: Communities
Ferrexpo's assets have a long association with local communities, and this
connection has been important in 2022, enabling us to provide direct
assistance to communities during Russia's invasion of Ukraine.
Ferrexpo Humanitarian Fund
In the early stages of the war, it quickly became apparent that large
organisations within Ukraine would play an important part in supporting the
people of Ukraine, particularly as the government of Ukraine focused on
fighting a full scale invasion. As a result, the Board of Directors approved
the formation of the Ferrexpo Humanitarian Fund early in the conflict, with
the goal of providing direct assistance to communities affected by Russia's
invasion in 2022. Each project is individually approved by the Health, Safety,
Environment and Community ("HSEC") Committee members to ensure good governance
in the approval process. To date, more than 70 projects have been implemented,
and details of this work are provided in the Case Study over the page.
Additional support has been provided throughout the war, with our help in
funding the "Unbreakable Mother" programme, which offers residential stays and
psychological support for women and children who have been affected by the war
in Ukraine.
Ferrexpo Charity Fund
Our Ferrexpo Charity Fund has operated in Ukraine for more than 11 years, and
aims to provide direct support to local communities situated close to our
operations in central Ukraine. Funding for the Ferrexpo Charity Fund, which is
in addition to the Ferrexpo Humanitarian Fund (see above), was UAH 77 million
in 2022 (2021: UAH 87 million). Work by the Ferrexpo Charity Fund focused on
providing budgetary support for local authorities, support for educational and
medical institutions and direct aid to individuals in the form of food and
support packages.
Sustainability reporting for all stakeholders
In August 2022, we published our latest standalone Responsible Business
Report, with this timing in line with previous years despite the impact of the
war in Ukraine. This is a credit to our communications team in Ukraine, who
managed to achieve this timing despite spending many days in air-raid shelters
and in remote locations, sheltering from the conflict.
We also achieved a significant milestone in our sustainability reporting in
2022 - in November, we managed to publish our first official sustainability
report in Ukrainian, helping our local stakeholders to understand the efforts
being undertaken to support Ukraine and develop our business at the current
time. We value all of our stakeholder groups, and are proud to reach a broader
spectrum of stakeholders through reporting in Ukrainian.
Case Study: Humanitarian efforts
Across all initiatives, including direct donations provided by Ferrexpo
subsidiaries, we have provided the equivalent of approximately US$19 million
of support for Ukrainian humanitarian causes since the outset of Russia's
invasion in 2022. Examples of projects supported include:
· Housing refugees: More than 3,500 internally displaced people have
been housed at our accommodation facilities.
· Providing free meals: Initially we dedicated our catering
facilities to providing three free meals a day to employees. More recently,
these efforts have been re-diverted to feeding local communities. In total, we
have donated 528 tonnes of food to local communities.
· Vehicle donations: Equivalent of over US$5 million of vehicles
donated to the Ukrainian authorities (armed forces and local territorial
defence units). Donations also include six armoured ambulances donated in
November 2022.
· Medical support: Through liaison with local medical facilities, we
have provided PPE for local hospitals, the equivalent of US$600,000 of helmets
and body armour for emergency response workers in the Poltava region and a
total of nine ambulances.
· On-site children's centre: Throughout the early phase of the war,
schools remained closed and children's learning was put on hold. In response,
Ferrexpo facilitated an on-site childcare facility to keep employees' children
close and allow children to continue their studies, with up to 120 children
attending daily.
· IT support: We provided the equivalent of 6,000 items of modern
technology, such as laptops, monitors, printers, mobile phones and modems, to
help to support local authorities' efforts to coordinate the registration and
housing of internally displaced people.
In addition, to support Ukrainian culture, we recently asked employees to
express their personal experiences of the war in poetry, and we collated their
words to form a collective tribute: "I want to live without war". In honour of
Defenders Day in Ukraine, we brought five of our colleagues together to recite
the poem, spreading a message of hope for a peaceful future for Ukraine in
these difficult times. Please see the link below for a video of this project.
We have also sought to preserve a record of this point in Ukraine's history,
understanding the need for documenting the experiences of those suffering
during Russia's invasion. We have invited displaced people to voluntarily
record details of the war with our in-house communications team, with a goal
of preserving a record of the acts of bravery and resilience in defending
Ukraine for future generations. This project has to date recorded 45 hours of
footage from 59 contributors, and we will continue to record people's
reflections as the war continues.
Responsible Business: Governance
With good corporate governance, companies are able to build trust with their
stakeholders. Through trust, companies can enjoy the benefits of a strong
brand that stakeholders can associate with.
Board composition
Effective corporate governance starts with the Board of Directors ("Board").
As of the date of this document, Ferrexpo's Board comprises seven Directors -
including one Executive Director (Jim North) and five Independent
Non-executive Directors.
Board changes
In December 2022, Non-executive Director Kostyantin Zhevago resigned from the
Board. Mr Zhevago is the ultimate beneficial owner of the Group's largest
shareholder - Fevamotinico S.a.r.l ("Fevamotinico"). Due to the proportion of
the Group's issued shares held by Fevamotinico, a relationship agreement
exists between Ferrexpo and Fevamotinico, under which Mr Zhevago has the right
to appoint a nominee to the Board.
Board position appointments
During the year, Independent Non-executive Director Fiona MacAulay was
appointed as Senior Independent Director ("SID"), which is an important role
that helps facilitate dialogue between fellow Directors and the Chair, and
enables shareholders to speak directly with the Board.
In early 2022, following the appointment of Fiona MacAulay as SID, the Board
underwent a number of changes. Independent Non-executive Director Ann-Christin
Andersen moved to take up the role of Chair on the Health, Safety, Environment
and Community ("HSEC") Committee. Independent Non-executive Director Natalie
Polischuk, who joined the Board in December 2021, was appointed as a member of
the HSEC and Audit Committees in February 2022.
Finally, in February 2022, Jim North was appointed as Chief Executive Officer
on a permanent basis, reflecting Mr North's successful period as Interim CEO,
with Mr North already appointed as an Executive Director.
FTSE Women Leaders Review
The FTSE Women Leaders Review is an independent, business-led framework
supported by the Government, which sets recommendations for Britain's largest
companies to improve the representation of Women on Boards and in Leadership
positions. As a result of this work, the FTSE Women Leaders Review recommends
that companies listed within the FTSE 350 have at least 40% female
representation at Board level by the end of 2025, as well as at least one
woman appointed as chair, senior independent director ("SID"), CEO or CFO by
the end of 2025.
As of the date of this report, Ferrexpo's Board is 43% female (31 December
2021: 38%), meaning that Ferrexpo satisfies the recommendation for Board
gender diversity set by the FTSE Women Leaders Review, as well as the
requirement for a female in one of the stated roles, with Fiona MacAulay as
the Group's SID.
Parker Review
The Parker Review was an independent review in 2021 led by Sir John Parker,
which considered how to improve the ethnic and cultural diversity of UK Boards
to better reflect their employee base and the communities they serve. In order
to encourage progress in ethnic diversity, the Parker Review proposed a target
of one Director from an ethnic minority group on the Boards of FTSE 250
companies by December 2024. The search for an independent Non-executive
Director from a minority ethnic group has been launched and is ongoing.
Corporate governance controls
The Group's financial advisors are Liberum Capital Limited ("Liberum"), which
also provide broking services to the Group. As a London-listed company, it is
best practice for the Company to have a Sponsor to provide advice and guidance
on certain corporate matters, with BDO LLP appointed in this role.
Stakeholder engagement
As a responsible, modern company, we aim to engage with our shareholders, to
understand their concerns and priorities. Shareholder engagement is conducted
via a range of methods - from various reports published on an annual basis
(Annual Report and Accounts, Responsible Business Report and Climate Change
Report), to our corporate website and social media channels.
We also endeavour to engage with stakeholders located within Ukraine and
overseas, with this made possible through communications in both Ukrainian and
English. In 2022, we communicated in both languages across the majority of our
social media channels and the 2021 Responsible Business Report, as well as
selected press releases.
Related party matters
The Group has a controlling shareholder that also has a number of different
businesses with which the Group has a commercial relationship.
In order to maintain strong levels of corporate governance, and to ensure that
these business relationships are conducted on an arm's length basis, the Group
has both the Committee of Independent Directors at the Board level and the
Executive Related Party Matters Committee at the management level.
As discussed in previous Annual Report and Accounts, the Committee of
Independent Directors ("CID") conducted a review in connection with the
Group's sponsorship arrangements with FC Vorskla and concluded its enquiry in
March 2021. Arrangements were put in place by Kostyantin Zhevago and his
associated entities, which were executed by 31 July 2022, and the CID can
confirm that, as of the date of this Annual Report and Accounts, these
arrangements have now been completed.
Risk Management
Ferrexpo identifies and assesses risks based on each risk's probability of
occurrence and the severity of any event. The Group aims to mitigate the
potential impact of each risk through its management of day-to-day activities,
taking a prudent approach to risk where possible.
Risk identification
Ferrexpo aims to manage risks across its business through the early
identification of potential risks before they emerge, with senior managers and
the Group's executive management team responsible for maintaining risk
registers for each area of the Ferrexpo business. Risk registers are regularly
reviewed and updated, with local risk owners reporting to senior management
teams on a regular basis.
The Group risk register records risks on the basis of the likelihood of
occurrence and level of potential impact on the Ferrexpo business. A total of
44 risks were included on the Group risk register as of December 2022, with
risks ranging from the war in Ukraine (both direct and indirect), risks
relating to operating in Ukraine, operational risks such as the risk of a pit
wall failure, health and safety-related risks, and risks relating to
information technology and climate change. Further to the Group risk register,
which records the risks with the most serious potential impact and likelihood
of occurrence, operating entities maintain their own local risk registers,
which feed into the Group risk register. In late 2022, the Group implemented
an enterprise risk management ("ERM") tool to help record and monitor risks,
which is the platform for the reporting and assessment of risks within the
Group.
The Group considers emerging risks to be risks that are newly developing, or
increasing in potential severity of impact, or changing risks that are
difficult to quantify.
The risks that are assessed by the Group's management to be Principal Risks
are presented on pages 34 to 49.
Risk mitigation
Risks are inherent in operating a business and it is through effective risk
identification, risk management, prudent decision making and other risk
mitigation measures, that the Group can understand and reduce the risks that
the business faces. The Group's management team, however, understands that it
cannot eliminate risk. The Group's approach to risk mitigation for each of the
Group's Principal Risks is presented below.
Risk governance framework
Risks are reported internally on a monthly basis, as part of the Finance, Risk
Management and Compliance ("FRMC") Committee, with the Group's senior
leadership team reviewing the Group-level risk matrix, which plots the
likelihood of occurrence against the potential severity of impact, and
identifying material changes in either variable to all of the risks listed.
Over 40 risks are reported on the Group risk register to the FRMC Committee on
a monthly basis, with each risk attributed a potential monetary impact should
an event occur. The FRMC Committee reports to the Group's Executive Committee,
which in turn reports to the Board, which has the ultimate responsibility for
the Group's approach to risk management. The Audit Committee, a sub-committee
of the Board, assists the Board in its regular monitoring of the risks faced
by the Group. The Group's internal audit function assists with the process of
risk review, and conducts ad hoc reviews of risk management controls and
procedures.
Risk assessment for 2023
The risk matrix opposite depicts the Principal Risks facing the Group.
Page 54 of the 2021 Annual Report and Accounts highlighted a rising risk
profile facing the Group in 2022, with significant uncertainty relating to
rising tensions between Russia and Ukraine. Through the course of 2022, a
number of these potential risks have eventuated, following Russia's invasion
of Ukraine in February 2022, which has had a significant impact on the Group's
ability to operate. Further details on the conflict risk facing the Group are
provided on page 35 of this report.
In addition to the war in Ukraine, a secondary effect of the conflict is the
increased political alignment within Ukraine. It is unclear as to the eventual
impact of this change on the Group, which in turn creates a potential risk for
the Group should the political landscape shift adversely. Further details of
the risks associated with operating in Ukraine are provided on page 36.
The ongoing global Covid-19 pandemic remains a Principal Risk facing the
Group, despite the gradual unwinding of government restrictions around the
world relating to containing infection rates and treating those infected.
Given the lower impact of more recent strains of Covid-19, the direct impact
of this risk is seen as reduced compared to previous years. For further
details on this risk, please see page 49.
Climate change is a rising Principal Risk, and the Group is facing both
physical and transitional risks, with increased reporting requirements likely
in the near term. This topic is covered on pages 24 and 48 of this report,
with particular reference to climate change related risk reporting under the
Task Force on Climate-related Financial Disclosures ("TCFD") framework.
Risk management process
Ferrexpo Board
- Takes overall responsibility for maintaining sound risk
management and internal
control systems.
- Sets strategic objectives and defines
risk appetite.
- Monitors the nature and extent of risk exposure, which
includes principal and emerging risks.
Audit Committee Executive Committee Health, Safety, Environment and Community ("HSEC") Committee
- Supports the Board in monitoring risk - Assesses and mitigates Group-wide risk. - Oversees corporate social responsibility related matters and
exposure and risk appetites.
performance.
- Monitors internal controls.
- Reviews effectiveness of risk management - Has specific focus on safety and climate change related risks.
and control systems.
Finance, Risk Management and Compliance ("FRMC") Committee - Monitors centralised financial risk
management structures.
- Monitors Group compliance.
Internal audit function - Supports the Audit Committee in reviewing the effectiveness of
risk management.
- Tests internal control systems and recommends improvements.
Operational level - Risk management processes and internal controls embedded
across all Ferrexpo operations.
Principal Risks
Principal Risks are those considered to have the greatest potential impact on
the Ferrexpo business, assessed on the basis of impact and probability.
Introduction
This section outlines the Principal Risks facing the Group in 2022, each of
which have the ability to negatively impact the Group, either in isolation or
in tandem with other risk areas. Principal Risks are defined as factors that
may negatively affect the Group's ability to operate in its normal course of
business, and may be internal, in the form of risks derived through the
Group's own operations and activities, or external, such as political risks,
market risks or climate change related risks. The Principal Risks listed here
are not exhaustive, nor are they mutually exclusive, and therefore one risk
area may negatively impact another risk area.
Principal Risks include, but are not necessarily limited to, those that could
result in events or circumstances that might threaten the Group's business
model, future performance, solvency or liquidity and reputation.
Risks are inherently unpredictable, and, therefore, the risks outlined in this
report are considered the main risks facing the Group. New risks may emerge
during the course of the coming year, and existing risks may also increase or
decrease in severity of impact and/or likelihood of occurrence, and this is
why it is important to conduct regular reviews of the Group's risk register
throughout the year. The Group maintains a more extensive list of risks,
covering over 40 different risks at the Group level, with additional risks
considered in local risk registers at each operating entity. The Group risk
register is reviewed on a monthly basis for completeness and relevance by the
Group's Finance, Risk Management and Compliance ("FRMC") Committee, which
ultimately reports into the Board for further review and approval of the risk
register. The Group risk register is also reviewed by the Audit Committee at
least four times a year. The members of the Executive Committee manage risk
within the business on a day-to-day basis. The Committee includes the Chief
Executive Officer, Chief Financial Officer, Chief Marketing Officer, Group
Chief Human Resources Officer and General Director of Ferrexpo Poltava Mining.
The Group's management team continually reviews and updates its view on, and
approach to, risks facing the Group. This section of the Annual Report and
Accounts primarily covers risks facing the Group in 2022, but also early 2023,
up until the publication date of this report. A further update on the
Principal Risks will be provided in the Interim Financial Results, which is
due to be published in August 2023.
Key theme: Russian invasion of Ukraine in 2022
On 24 February 2022, Russia launched a full scale military invasion of
Ukraine, with the conflict continuing as of the date of this report. This
event has significantly changed the operating environment for businesses in
Ukraine on an unprecedented scale. Please see page 35 for more information on
this risk area.
Key theme: Ukraine country risk
This area has been listed as a Principal Risk facing the Group since listing
in 2007, and the Group has successfully operated amid challenging
circumstances for more than 15 years. The war in Ukraine has served to
escalate a number of risks relating to Ukraine, including risks relating to
the political environment and the independence of the legal system. Please see
page 36 for more information on this risk area.
Key theme: climate change
An important topic for any modern business, with discussions with multiple
stakeholder groups centring on the Group's efforts to reduce emissions both in
the Ferrexpo business, but also in the Group's value chain (Scope 3
emissions). As a consequence of rising stakeholder focus on this topic, the
Group published its first standalone report on climate change in December
2022. Please see page 48 for more information on this risk area.
Key theme: cybersecurity
As a business seeking to modernise, the Group is increasingly reliant on
electronic software for the management of key operational and administrative
activities. As a business primarily operating in Ukraine, the Group has faced
heightened cybersecurity threats from malicious parties since 2014, coinciding
with Russia's initial invasion of Ukraine's sovereignty. Please see page 47
for more information on this risk area.
Key theme: Covid-19
The war in Ukraine has resulted in significantly lower levels of testing for
Covid-19 throughout the country, and therefore this represents a potentially
unmonitored risk in the general population of Ukraine. Please see page 49 for
more information on this risk area.
Each Principal Risk is linked to the aspects of the Group's strategy that
could be impacted if an event were to occur.
1. Produce high quality pellets.
2. Achieve low cost production.
3. Maintain strong relationships with a network of premium customers.
4. Conduct business in a safe and sustainable manner.
5. Retain a balanced approach to capital allocation.
1. Country risk
1.1. Conflict risk (external risk)
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Low / Increasing 1, 2, 3, 4 and 5
On 24 February 2022, Russia began a full scale invasion of Ukraine that has
significantly impacted every layer of the Ukrainian state, including the focus
of the government, companies' ability to operate and the health and wellbeing
of each individual within Ukraine. Prior to this date, major concerns were
raised about the possibility of an invasion, following a significant build-up
of military equipment and personnel along Ukraine's borders. Following 24
February 2022, people and companies within Ukraine have faced direct military
action in the form of damage and destruction caused by military conflict, as
well as indirect impacts of the war, such as electricity blackouts and the
closure of the Black Sea for Ukrainian ports.
Ferrexpo's main operations are in the Poltava region of central Ukraine, which
has not seen any direct combat between Russian and Ukrainian forces. The
entirety of Ukraine has, however, faced numerous missile strikes and power
outages, and the Poltava region is no exception. The Group's facilities have
not been directly targeted by Russian missile strikes, but a number of
neighbouring third party facilities such as the Kremenchuk oil refinery and
state owned electricity infrastructure have been damaged by such attacks. Such
damage has materially affected the Group's ability to source fuel and receive
electricity, with damage to electrical infrastructure in October 2022
resulting in the partial suspension of production activities (as announced on
11 October 2022). Following repair work completed on the electrical grid in
the fourth quarter of 2022, the Group resumed activities in December 2022,
with sufficient power to operate one pelletiser line. This situation has
continued, with the Group restarting a second pelletiser line in March 2023,
and the Group able to ship its products throughout January and February 2023.
The war in Ukraine has placed an unprecedented strain on the economy of
Ukraine, with a number of businesses closing, rising unemployment, and tax
revenues falling, in addition to other factors negatively impacting revenues.
At the same time, spending on the military and social programmes both
increased significantly in 2022. Consequently, the government of Ukraine has
sought to increase revenues through changes to its fiscal policies, such as
increases to railway tariffs, as well as implementing measures to stabilise
the economy, such as enacting laws for the repatriation of funds and currency
controls. A number of these measures have the potential to either directly or
indirectly impact Ferrexpo negatively through consequences such as lower
revenues and/or a more restrictive operating environment. Furthermore, given
the strain placed on the economy of Ukraine, the exchange rate for the
Ukrainian hryvnia depreciated significantly in 2022, with the government
introducing a peg for the hryvnia to the US dollar. After the invasion of
Ukraine in February 2022, this peg was set at UAH 29.25 per US dollar, and was
subsequently moved to UAH 36.5 per US dollar in July 2022. Such a rapid
devaluation of the local currency in Ukraine, which was approximately UAH
27.28 per US dollar as recently as the end of 2021, has had a significant
impact on the Group's costs, assets and shareholders' equity. For more
information, please see page 11.
As a result of the war, a proportion of the Group's workforce in Ukraine has
enlisted in the Armed Forces of Ukraine, relocated to safer locations and/or
moved to care for loved ones. Additionally, perceptions around the negative
outlook for Ukraine and/or the Group may result in key individuals seeking
employment outside the Group. As such, the Group faces potential risks around
being able to adequately staff its operations and other functions within its
business.
Additional risks related to the war in Ukraine include, but are not limited
to, restrictions related to the cost effective and timely transport of the
Group's products, restrictions in accessing markets, rising costs related to
reduced output and/or alternative supply arrangements and the impact on
employee wellbeing. A summary of the war's impacts is provided on page 5 of
this report.
Risk mitigation
The health and safety of the Group's workforce, and those connected to the
Ferrexpo business such as suppliers and logistics operators, is the primary
concern.
Whilst it is difficult for a company such as Ferrexpo to defend itself from
direct military activity such as Russia's invasion or a missile strike, the
Group has taken several measures over the course of the year to help keep its
workforce, and their families and local communities safe from the threat posed
by Russia's invasion. Measures during the year have included remote working
for those able to do so, timing of shift patterns to fit with curfew hours,
the provision of on-site childcare facilities to ensure children are close and
employees are not having to travel unnecessarily, the provision of air-raid
shelters and the provision of protective equipment such as armoured vests and
helmets for employees serving in the Armed Forces of Ukraine. The Group has
also engaged in extensive discussions with local authorities, and has stepped
up to provide financial assistance through the Ferrexpo Humanitarian Fund,
managed by the Ferrexpo Charity Fund, with oversight by the Board of Directors
of Ferrexpo to ensure good governance in all support activities. Please see
page 31 for more on this subject.
The Group will continue to take measures as required to protect its workforce,
and their families and local communities, for the duration of the war, and
during the post-war period where continued support is required. The Group has
a long track record of providing direct support to the communities in which it
operates, with the Ferrexpo Charity Fund in operation for more than 11 years.
1.2. Ukraine country risk (external risk)
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Medium / Increasing 1, 2, 3, 4 and 5
The considerations outlined here are separate to the risks relating to the
ongoing war in Ukraine, but some or all of them may be exacerbated by the
current conflict (see page 35 for risks relating specifically to the conflict
in Ukraine).
Ferrexpo's main operations are in Ukraine, which is considered to be a
developing economy under the classifications provided by the World Bank(( 49
(#_ftn49) )). Ukraine is a country that placed 77th in the United Nations'
Development Programme's ("UNDP") Human Development Index(( 50 (#_ftn50) )),
and is therefore classified as having a "high" level of human development
(based on factors such as life expectancy and levels of education). This
ranking places it in a similar bracket to China (79th) and Sri Lanka (73rd),
other countries considered to be developing economies. As a result of
operating in a developing economy, the Group is subject to a number of
elevated risks, such as the fiscal and political stability of Ukraine,
independence of the judiciary, access to key inputs and capital, exposure to
monopolies and other influential businesses (particularly those that are
related parties to the government of Ukraine), in addition to a range of other
factors. As a result of being a business in a developing economy, the Group is
exposed to heightened risks around corruption, with Ukraine placing 122nd in
Transparency International's Corruption Perception Index ("CPI")(( 51
(#_ftn51) )). Whilst Ukraine's score in the CPI has improved from a low of 25
in 2013 to 33 in 2022, and its global position has improved by 28 places
(including an improvement of six places in 2022 alone), the country continues
to remain below the global average.
Through the Group's exposure to an operating environment in a developing
economy, Ferrexpo has been subject to a number of risk areas that are
heightened relative to those expected of a developed economy. Risks associated
with the war in Ukraine are covered on page 35 of this report, but there are
indirect risks associated with the war, such as the increasing political unity
within Ukraine and determination to drive political, fiscal or economic
change, the latter of which is often associated with financial and military
agreements struck with western governments and/or western organisations. This
change can be exhibited in a number of practical applications, which can
include, but are not limited to, changes to the regulatory environment,
potential increases to tax and/or royalty rates, increased disclosure
requirements or operational restrictions. Changes may be made as a result of
government decision making, a third party international partner and/or lender,
or another party within Ukraine, and therefore the rationale for changes may
not correlate with the official agenda of the government of Ukraine. As a
result of this local instability, which is amplified by the war in Ukraine
(see page 35), sources of capital for businesses deriving their revenues from
Ukraine are limited at the present time, which in turn reduces the operational
flexibility of the Group.
The independence of the judiciary in Ukraine has been frequently referenced in
the Principal Risks section of the Group's Annual Report and Accounts, and
this is a consideration that remains particularly relevant for the Group
today. As described in Note 15 (Commitments, contingencies and legal disputes)
to the Consolidated Financial Statements, the Group is currently subject to
several legal proceedings in Ukraine that are similar in part to previously
heard legal proceedings, and it cannot be guaranteed that the Ukrainian legal
system will always provide a ruling in line with the laws of Ukraine or
international law. As disclosed in the 2021 Annual Report and Accounts, the
Group is currently subject to a claim pursuant to which the claimants are
seeking to invalidate a share sale and purchase agreement dated 2002 relating
to the acquisition of 40.19% of Ferrexpo Poltava Mining, the Group's main
operating subsidiary in Ukraine (the "Claim"). Following a first hearing of
the Claim in 2021, a court in Ukraine found in favour of the Group. An appeal
was heard in September 2022, with the appeal court ruling in favour of the
claimants and ordering that 40.19% of Ferrexpo Poltava Mining be transferred
to the claimants (as announced by the Group on 20 September 2022). Subsequent
to this ruling, the Group has moved to commence proceedings at the Supreme
Court of Ukraine, with a preliminary hearing held on 1 December 2022 whereby
it was agreed for the case to be transferred to the Grand Chamber of the
Supreme Court, with the next hearing scheduled to take place on 15 March 2023.
As at the date of this report the claimants have not sought to enforce the
appeal court ruling, but it remains possible that they could seek to do so
notwithstanding the on-going proceedings before the Grand Chamber of the
Supreme Court. If the Group is unsuccessful at the hearing before the Grand
Chamber of the Supreme Court, and the original 2002 share sale and purchase
agreement is held to be invalid, this would have a material adverse impact on
the Group, including through the loss of a significant proportion of the
Group's main operating asset in Ukraine.
As referenced in the Group's previous public reporting, including in the
Group's Interim Results published in August 2022, there are outstanding
allegations relating to the Group's controlling shareholder, Kostyantin
Zhevago, that remain unresolved, and there is a risk that assets owned or
controlled (or alleged to be owned or controlled) by the Group's controlling
shareholder may be subject to restrictions, in Ukraine or elsewhere, or that
the Group may be impacted by, or become involved in, legal proceedings
relating to these matters, in Ukraine or elsewhere.
On 27 December 2022, it was announced that Mr Zhevago had been detained whilst
in France, and subsequently released on bail, at the request of the
authorities in Ukraine, who are reportedly seeking his extradition to Ukraine
in connection with allegations relating to a former Ukrainian bank owned by Mr
Zhevago (Bank Finance & Credit). Following this event, Mr Zhevago resigned
his position as Non-executive Director on the Board of Directors. The legal
case relates to the potential extradition of Mr Zhevago, and associated legal
claims being made in Ukraine, and remains outstanding as of the date of this
report. The risks relating to the Group as a result of this legal action, and
potential further legal action, cannot be accurately estimated at the present
time, nor can the potential timeline for resolving any matters.
As a consequence of recent events relating to the Group's controlling
shareholder, as outlined above, the Group may experience adverse effects, such
as negative media attention for the Group, a reduced ability to operate within
Ukraine and/or overseas due to negative perceptions of the Group, and a
restricted operating environment for aspects of the Group's business, such as
closure (or suspension) of relationships with stakeholder groups such as
banking services. The Group's relationships both upstream and downstream may
also be negatively impacted by events related to the Group's controlling
shareholder, such that the Group is limited and/or impaired in its ability to
do business overseas in a specific country and/or region. In addition,
restrictions imposed on the Group's controlling shareholder (and/or negative
perceptions of the Group's controlling shareholder) may potentially adversely
impact the Group within Ukraine, with a restriction on the Group's ability to
successfully operate its business model. A number of legal claims or
legislative actions within Ukraine are known as of today - as detailed in this
section, and further actions to restrict the Group's ability to operate may
arise in the future. It is difficult for the Group to predict the scale or
nature of such restrictions, and therefore the Group is limited in its ability
to pre-empt and mitigate risks in this area.
The Group is subject to a number of actions by the government of Ukraine that
threaten to destabilise, or have the effect of destabilising, the operating
environment in which the Group exists. For example, in previous years, the
government of Ukraine has cancelled exploration licences by Presidential
decree, providing minimal detail in terms of an explanation or rationale.
As previously referenced in the Group's 2021 Annual Report and Accounts, in
June 2021, the government of Ukraine cancelled a mining licence for an
early-stage exploration project known as Galeschynske, which is a licence held
by Ferrexpo Belanovo Mining and located to the north of the Belanovo mine
(without forming part of this mine). This matter remains outstanding, and
there remains a risk that this dispute may increase in scale and/or severity
for the Group. The Group has been informed of other licence disputes by the
government, which are similar in scale to the licence dispute discussed above.
It is difficult for the Group to predict the outcome of existing licence
disputes, and whether new claims and/or disputes may arise in relation to the
Group's operating licences.
In 2022, the government of Ukraine questioned the documentation relating to
the management of a now-dormant waste dump that was originally constructed and
operated prior to Ukraine's independence in 1991. The Group continues to
engage with local authorities and the national government of Ukraine, aiming
to constructively resolve questions and concerns raised. Please see section
titled "Ecological Claims" on page 71 for more information.
As previously referenced in the Group's 2021 Annual Report and Accounts, a
number of the Group's subsidiaries in Ukraine received letters from the Office
of the Prosecutor General, notifying them of an ongoing investigation into a
potential underpayment of royalties between 2018 and 2021 (the
"Investigation"). On 3 February 2023, one of the Group's senior managers in
Ukraine received a notice of suspicion in relation to this Investigation. On 6
February 2023, as part of the Investigation, a court order was issued in
Ukraine freezing the bank accounts of Ferrexpo Poltava Mining ("FPM"). These
actions by the government of Ukraine mirror actions taken in similar
investigations into other metals and mining companies in Ukraine, and
therefore represent a scenario that the Group was aware of and able to
partially mitigate the associated risks. The Group is engaging with the
authorities in Ukraine and intends to appeal the court order issued as part of
the Investigation. Stakeholders should note that the Group may not be able to
successfully challenge this court order to freeze FPM's bank accounts and/or
may not be able to successfully challenge the claims being made as part of the
Investigation. As of late February 2023, the Group has managed to get certain
aspects of this court order to be repealed, enabling the Group to pay certain
amounts such as salaries (but other restrictions remain in place).(( 52
(#_ftn52) ))
The Group's exposure to operating in Ukraine can result in high velocity
risks. Risk velocity relates to how fast a risk may escalate in scale and
affect an organisation, with high velocity risks considered to be those that
move rapidly from a starting point of having a low likelihood and/or scale of
impact, to having a high likelihood and/or scale of impact. Examples of high
velocity risks would be natural disasters and armed conflict, both of which
could be difficult to predict in advance and could have a significant impact
on a business.
The risk factors discussed here in this section, either individually or in
combination, have the ability to materially adversely impact the Group's
ability to operate its pellet production and other facilities, ability to
export its iron ore products, access to new debt facilities and ability to
repay debt, ability to reinvest in the Group's asset base, either in the form
of sustaining capital investment(A) (to maintain production or expansion),
capital investment(A) for future growth, or the Group's ability to pay
dividends, could result in a material financial loss for the Group and/or
could result in a loss of control of the Group's assets.
Risk mitigation
Ferrexpo operates in accordance with relevant laws and utilises internal and
external legal advisors as required to monitor and adapt to legislative
changes or challenges.
The Group maintains a premium listing on the London Stock Exchange and as a
result is subject to high standards of corporate governance, including the UK
Corporate Governance Code and UK Market Abuse Regulation. Ferrexpo has a
relationship agreement in place with Kostyantin Zhevago, which stipulates that
the majority of the Board of Directors must be independent of Mr Zhevago and
his associates. For all related party transactions, appropriate procedures,
systems and controls are in place and adhered to.
Ferrexpo prioritises a strong internal control framework including high
standards of compliance and ethics. The Group operates a centralised
compliance structure that is supported and resourced locally at the Group's
operations. Ferrexpo has implemented policies and procedures throughout the
Group including regular training. Ferrexpo prioritises sufficient total
liquidity(A) levels and strong credit metrics to ensure smooth operations
should geopolitical or economic weakness disrupt the financial system of
Ukraine. Ferrexpo looks to maintain a talented workforce through skills
training and by offering competitive wages, taking into account movements of
the Ukrainian hryvnia against the US dollar and local inflation levels.
Ferrexpo has a high profile given its international client base and London
listing, and it is important that Ferrexpo's Board of Directors and relevant
senior management continue to engage with the Group's stakeholders to
effectively communicate the economic contribution that Ferrexpo makes to
Ukraine and to show that it operates to high international standards.
1.3. Counterparty risk (external risk)
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Low / Increasing 4
As a business operating in an emerging market, and also as a business
operating in a country that is currently engaged in an armed conflict, there
are significant risks in respect of the Group's business interactions with
third party suppliers of goods and services. Risks may relate to a number of
subject areas, including (but not limited to) governance and corruption risks,
risk of collapse, risks relating to monopolies and/or situations whereby
alternative suppliers may not be available, and counterparty risks relating to
the conflict in Ukraine whereby counterparties may be exposed to Russia (with
such relationships potentially not being known to the Group). The Russian
invasion of Ukraine in 2022 has imposed a significant strain on the economy of
Ukraine and has therefore heightened the counterparty risks facing the Group.
A secondary effect of the ongoing war in Ukraine is that the Group may be
impacted in its ability to conduct effective due diligence on counterparties
given the imposition of martial law in Ukraine, and other war-related
restrictions. The Group has had to change a number of key suppliers in 2022,
and in doing so, has had to conduct due diligence checks as part of each new
relationship, which carries inherent risk to the Group.
Counterparty risks may result in direct consequences for the Group such as
financial harm and operational issues in sourcing material, and also include
indirect consequences such as damage to the Group's reputation either within
Ukraine or with international stakeholders, such as investors, lenders and
customers.
Additionally, as outlined on page 36 (Ukraine Country Risk), recent events
relating to the Ultimate Beneficial Owner ("UBO") of the Group have resulted
in secondary effects on a number of business relationships of the Group. The
Group is currently managing these risks either through existing relationships
or through new relationships, and it should be noted that any new (or change
of existing) business relationship carries an inherent counterparty risk to
the Group.
In recent times, the global Covid-19 pandemic has placed a significant strain
on the financial stability of third parties and has also increased the risk of
collapse of counterparties. Whilst the direct effects of Covid-19 are less
evident in Ukraine and Europe in 2022, this remains a risk, particularly given
the global footprint of Ferrexpo's business model. As referenced on page 49,
risks relating to Covid-19 are heightened in Ukraine at the present time given
the national government's focus on defending its sovereignty in light of
Russia's ongoing invasion. Consequently, testing for Covid-19 has been
significantly reduced, and the associated risks related to counterparty
failure are heightened as a result.
Risk mitigation
In terms of supplier governance, the Group's Compliance Department conducts
regular checks on all suppliers, screening entities for a number of risks and
elevating those deemed to be higher risk for further checks and consideration
as to their eligibility. For entities that the Group conducts business with,
the Group has developed a Code of Conduct for Suppliers, which as of 2022 is
referenced in 90% of all contracts and over 1,300 due diligence checks
completed on potential third party suppliers (2021: 95%). Note that the
decrease in proportion of contracts referencing compliance clauses is
attributable to the ongoing conflict in Ukraine, and associated restrictions.
The Group's exposure to the failure of a counterparty, or the failure of a
party to provide its contracted goods and services, is managed through the
Group engaging with a range of suppliers, where possible, in addition to
sufficient cash reserves to maintain the Group's overall liquidity. Where it
is not possible and/or practical to source goods and services from multiple
providers, the Group considers alternative goods and services to meet its
needs and to reduce single party risk.
With regard to the structures in place to monitor and manage counterparty
risk, the Finance, Risk Management and Compliance ("FRMC") Committee, is an
executive sub-committee of the Board charged with ensuring that systems and
procedures are in place for the Group to comply with laws, regulations and
ethical standards. The FRMC Committee met ten times in 2022 (2021: ten) and is
attended by the Group Compliance Officer and, as necessary, by the local
compliance officers from the operations, who present regular reports and
ensure that the FRMC Committee is given prior warning of regulatory changes
and their implications for the Group. The FRMC Committee enquires into the
ownership of potential suppliers deemed to be "high risk", and oversees the
management of conflicts of interests below Board level and general compliance
activities (including under the UK Bribery Act 2010, the Modern Slavery Act,
the Criminal Finances Act, and the EU General Data Protection Regulation).
The Group aims to minimise risk around the timely provision of goods and
services through maintaining sufficient cash reserves and liquidity, as well
as maintaining alternative suppliers should one counterparty fail.
The Board aims to ensure adherence to the highest standards of diligence,
oversight, governance and reporting with all charitable donations, with the
Health, Safety, Environment and Community ("HSEC") Committee required to
provide approval for community support expenditures.
2. Market related risks
2. Risks relating to the global demand for steel
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Medium / Stable 3 and 5
The Group is a constituent of the global steel value chain, which is a sector
that is heavily reliant on global connectivity, and global factors that affect
the supply and demand balance of both steel and the raw materials required for
making steel.
Steel is typically made using processes that involve iron ore, a degree of
scrap steel (depending on the process method) and a source of energy (which
can include coal, natural gas and electricity). Prices for these key inputs
can be volatile, and are factors that will move independently of any single
steel producer's control, and will therefore have the ability to significantly
impact the profitability of individual steel producers. Additional factors
governing the input costs, and therefore profitability, of steelmakers
include: the availability and cost of labour, requirements for capital
investments to sustain and/or grow output, the availability of raw materials
and energy sources (in addition to unit costs), the cost and availability of
logistics routes and the presence of lower cost competitors in key markets.
Global steel demand varies considerably and can be significantly influenced by
factors outside of the control of a steel producer, such as political
instability (e.g. the war in Ukraine), global energy prices, and outlook for
the global economy. In addition to these macro-economic environment factors,
individual steel producing facilities and regions may be impacted by national,
regional and local factors such as political instability, political
intervention, weather events, cybersecurity events, and climate change,
amongst other factors.
Given that the factors listed here have the potential to materially impact the
profitability of steel mills, individual companies and/or facilities may
respond to higher costs and/or weaker market conditions by reducing or halting
steel production, until more favourable market environment returns. This in
turn could have a material effect on suppliers to such businesses, such as
Ferrexpo.
A more recent trend has seen a surge in awareness of climate change related
issues, which is driving increased changes within various levels of the
operating environment for steel companies - from local and regional government
enacting legislation related to climate change, to customers and local
communities demanding that steel production involve lower emissions. Efforts
to counter the effects of climate change in the steel industry, which
typically focus on the reduction of carbon emissions in the production of
steel, are likely to generate higher operating costs in the near term, and
higher requirements for capital investment(A) in the medium to long term.
Furthermore, whilst steelmakers' operating costs are likely to increase in the
near-term as a result of emissions reduction measures, end users of steel may
not agree to higher steel prices, and therefore profit margins are likely to
decrease until such costs are successfully passed through to end user markets.
The structure of the global steel industry relies on a consistent supply of
materials to steel mills and a consistent offtake of finished steel by
customers. As a consumer of bulk commodities, such as iron ore and coal, the
timely and reliable delivery of these materials is required for stable steel
prices, since any disruption in the delivery process can create short and
medium-term spikes in steel prices. Equally, a scenario whereby global markets
encounter an excessive supply of steel, either through an unforeseen downturn
in end-user demand, or disruptive increases in steel supply, could have a
negative effect on steel prices.
Global steel markets also rely on the consistent availability of logistics
pathways, and events such as the Russian invasion of Ukraine in 2022 or the
global Covid-19 pandemic, served to demonstrate the possibility of short-term
pricing fluctuations (both positive and negative) when global logistics chains
fail to function properly.
Risk mitigation
Under normal circumstances, the Group has the ability to mitigate risks around
demand for steel through its global customer base, with the Group having the
ability to shift sales to regions exhibiting higher demand for steel. This was
demonstrated in 2020 during the global Covid-19 pandemic, when Ferrexpo's
sales to China were increased significantly in response to a shift in demand
away from Europe and North East Asia. At the present time, however, the Group
has largely been unable to access the seaborne market for the majority of 2022
due to Russia closing Ukraine's access to the Black Sea. When the Group has
been able to access the seaborne market, it has not been in material
quantities, or on financially favourable terms, and therefore the Group's
ability to shift significant sales volumes to regions other than Europe has
been impaired in 2022. The ability of the Group to pivot its sales is a
measure that the Group intends to utilise once consistent and sizeable access
to the seaborne market is re-established, either through a Ukrainian port, or
otherwise.
Other risk mitigation activities include the Group's ability to produce high
quality forms of iron ore, which typically command higher premiums with
customers and also tend to be more in demand throughout the economic cycle.
Ferrexpo operates in a country whereby the local currency, the Ukrainian
hryvnia, is a currency that is linked to the performance of commodity prices,
and historically the Group has experienced depreciation in the hryvnia at
times of lower commodity prices, which in turn reduces the Group's
dollar-denominated cost base. Movements in the hryvnia-dollar exchange rate
can, however, be influenced by other factors and may not necessarily reduce
costs at times of low iron ore prices.
3. Risks related to realised pricing
3.1. Changes in pricing methodology (external risk)
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer and Chief Marketing Officer Medium / Stable 1, 3 and 5
Pricing formulas for iron ore pellets are governed by a number of factors,
including the iron ore fines price, a premium for additional ferrum content
(if applicable), pellet premiums, freight rates and additional quality
premiums and discounts depending on the type of iron ore pellet or concentrate
supplied and its chemistry. Industry-wide factors, which are outside of the
Group's control, can influence the methodology for pricing iron ore products,
in addition to the various premiums and discounts that are applied by
individual customers and individual regions. Premiums or discounts paid for
specific characteristics may change and adversely impact the Group's ability
to market specific products.
Should the standard method pricing methodology change in the future, it could
have a negative impact on the Group in the form of lower realised prices for
iron ore pellets and/or iron ore concentrate, and therefore resulting in a
negative impact on the Group's financial performance. Additional potential
impacts of changing perceptions around pricing methodology could include a
restriction in the Group's ability to sell its products to specific customers
and/or customer regions, should such stakeholders elect to pursue a different
pricing methodology with an alternative supplier of iron ore products.
As a producer of high grade forms of iron ore (grading 65% Fe and above), over
time, the Group has developed customer pricing agreements with customers on
the basis of high grade benchmark fines indices (grading 65% Fe). Such
agreements enable the Group to realise the value of the iron content in its
products, with high grade (65% Fe) fines index trading an average of US$19 per
tonne above the medium grade (62% Fe) in 2022 (2021: US$26 per tonne)(( 53
(#_ftn53) )). The premiums paid for material priced using the high grade
benchmark index reflects the restricted supply of high grade iron ores into
the global market, with the majority of supply being either low or medium
grade iron ores. Premiums paid for higher grade iron ores (referred to as the
"ferrum premium") also reflect the operational benefits to steel mills through
higher blast furnace productivity and lower emissions profiles associated with
higher grade input materials.
Should customer agreements return to pricing of its products using the medium
grade benchmark, the Group could potentially experience lower net realised
pricing for its products.
The Group also relies on pricing structures for its pellets to include a
pellet premium, which reflects the high quality, pelletised nature of the iron
ore delivered to customers. Given the benefits of pellets to steelmakers
(namely improved furnace productivity and/or reduced greenhouse gas
emissions), it is accepted practice that steelmakers pay an additional premium
for iron ore pellets (the "pellet premium"). Pellet premiums have varied
significantly in recent years, which reflects both supply and demand-related
factors. Given the scale of the pellet premium relative to the iron ore fines
index and pelletising costs, any move away from the market paying pellet
premiums would have a significant impact on our profitability and our
differentiation within the global landscape of iron ore producers.
Furthermore, a number of pellet premiums are quoted by third parties, which
are computed in a variety of ways. Any switch from using one specified pellet
premium to another quoted pellet premium, may also result in lower realised
pricing for the Group.
Risk mitigation
The Group aims to price its products through clear and consistent engagement
with customers, with the Group seeking to develop mutually beneficial
long-term relationships. Through consistent supply and consistent high quality
of the Group's products, Ferrexpo aims to maintain strong relationships with
its customers.
Through strong customer relationships, the Group aims to ensure that the net
realised prices received for its iron ore products are in line with the
international benchmarks for pricing of similar products, in addition to
premiums paid for the quality and/or form (i.e. pellet) of the iron ore being
traded.
Ferrexpo endeavours to achieve the prevailing market price at all times, and
the Group aims to be a low cost producer and therefore cash flow positive
throughout the commodities cycle.
3.2. Lower iron ore prices (external risk)
Responsibility Risk appetite / Change Link to strategy
n/a (Ferrexpo is not large enough to influence global demand) Medium / Stable 1, 3 and 5
This factor is one that is connected to risks related to the global demand for
steel (see page 39), since demand for steel directly impacts the pricing of
raw materials used to produce steel, such as iron ore.
As a company that derives the majority of its revenues from iron ore products,
Ferrexpo is inherently exposed to iron ore prices, either in the form of
benchmark iron ore fines prices, or pellet premiums. Variations in iron ore
prices come in a number of forms, from the underlying iron ore price, to the
premium paid for the grade of iron ore (the "ferrum premium"), or discounts
applied for the naturally occurring waste elements in each ore such as silica
and alumina.
The iron ore fines price is the largest component of pricing for the Group's
products, which averaged US$139 per tonne in 2022 (high grade iron ore fines
index, 2021: US$186 per tonne)(( 54 (#_ftn54) )). As discussed in the Market
Review section (see page 7, iron ore fines prices are predominantly affected
by Chinese demand for iron ore, which represented 75% of global imports of
iron ore fines in 2022 (2021: 76%), and the economic outlook for China(( 55
(#_ftn55) )).
The quoted price for iron ore fines is called the benchmark index, and is
applicable for forms of iron ore that have a specified chemistry that is
amenable for steelmaking, such as the percentage of each waste material
contained (e.g. silica, alumina, phosphorus). The Group's products typically
conform to the requirements of the benchmark index, and therefore tend not to
have penalties applied as a result. Iron ores that do not comply with the
benchmark index, however, will be subject to a range of penalties, which may
vary significantly depending on a range of market factors and technical
requirements of each steel mill. Any variation in the quality and/or chemistry
of the Group's iron ore that is mined in a given period could therefore result
in penalties being incurred.
A secondary component of the pricing structure of the Group's products is the
pellet premium, which is applied to the sale of iron ore pellets. This premium
is significant to the Group, and can represent a premium in excess of 50% of
the benchmark iron ore fines index. This component of the pricing structure of
the Group's products is discussed in detail on page 8.
Should reputational concerns over the Group and its UBO affect existing or
potential relationships, the Group may no longer be able to realise the same
level of product pricing as previously experienced.
Risk mitigation
The Group aims to mitigate price risk through producing high grade, low
impurity iron ore products, which receive premiums when sold to customers,
rather than penalties and/or discounts. Through such products, the Group has
been able to build a high-margin business, which in turn enables further
investment in the Group's production facilities.
In addition, the Group aims to be a low cost producer of iron ore products.
Through operating with a lower cost base than the Group's peers, particularly
when the premiums paid for grade and form (pellets) are considered, Ferrexpo
aims to remain competitive on a global basis.
Furthermore, Ferrexpo's operating costs are partly correlated with commodity
prices. When the commodities cycle is in a downward phase, Ferrexpo typically
receives a lower selling price, but the Group's cost base also tends to
decline as a result of local currency devaluation. The Ukrainian hryvnia is a
commodity-related currency and historically over the long-term it has
depreciated during periods of low commodity prices, although movements of the
Ukrainian hryvnia against the US dollar can also be influenced by short-term
political factors, in addition to other factors.
Ferrexpo regularly reviews its options in respect of hedging the price of its
output. The Group's current strategy is to not enter into such hedging
agreements due to the relatively low liquidity of this market and high cost of
entering into such arrangements. The Group will continue to review this
strategy as the market for hedging iron ore pellets develops over time, which
may eventually reduce the effective cost of such arrangements.
3.3. Pellet premiums
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer and Chief Marketing Officer Medium / Stable 1, 3 and 5
Pricing of the Group's products includes a component referred to as the pellet
premium, which references the pelletised nature of Ferrexpo's products, which
reduces the degree of processing required prior to steelmaking. As a
consequence of this reduction in processing at the steelmaking stage, buyers
of iron ore pellets will pay a premium over and above the prevailing iron ore
fines price. The pellet premium is one of the principal factors that enables
the Group to generate a significant margin on its products, and therefore
allows for a higher degree of investment in the Ferrexpo business.
An example of a quoted pellet premium is the monthly Atlantic Pellet Premium,
as quoted by S&P Global Commodity Insights, which averaged US$72 per tonne
in 2022 (2021: US$60 per tonne(1)) and therefore represented a significant
premium to the benchmark iron ore fines price. Note, however, that numerous
pellet premiums exist, and the Group may agree pellet premiums individually
with customers that do not mirror quoted pellet premiums.
Factors governing the pellet premium in any given year include the overall
supply of iron ore pellets, which tends to be a relatively stable industry,
and the overall demand for iron ore pellets. Demand factors can be related to
the health of the global economy and steelmakers' desire to maximise output,
which tends to result in higher pellet buying activity to increase a steel
mill's productivity. Pellet demand can also be impacted by increasing
regulation around emissions reduction, since iron ore pellets do not need to
be sintered like other forms of iron ore. Since sintering is a process that
typically involves the use of coal, steelmakers that utilise a greater
proportion of pellets in a blast furnace's input materials (partially
replacing sinter fines) can reduce the overall emissions footprint of steel
production.
The overall supply of iron ore pellets is relatively constrained, with
existing producers typically producing at their nameplate capacity and the
construction of new pelletiser capacity usually requiring significant capital
investment(A) to build production facilities, in addition to the associated
infrastructure required for delivering a bulk commodity to end users. As a
consequence, limited new pelletising capacity has been built in the past five
years. Supply-side disruption has been a more prominent factor in recent
years, with the failure of two tailings dams in Brazil resulting in
significant volatility in supply from two of the largest pellets exporters to
the global steel industry. Both of the companies involved in these incidents
have now resumed production from the affected production facilities, and
therefore the market has resumed a degree of supply-side balance not
previously seen in recent years.
Should reputational concerns over the Group and its UBO affect existing or
potential relationships, the Group may no longer be able to realise the same
level of pellet premiums as previously experienced.
Risk mitigation
Despite being one of the largest iron ore pellet exporters, the Group is not
sufficiently sized to be a price setting company when it comes to iron ore
pellet premiums and therefore the Group's realised pellet premium tends to
follow the level set by the main market participants.
It is the Group's strategy to target the low cost production of its iron ore
products, thereby enabling the Group to remain profitable for a range of
realised pellet premiums. More specifically, Ferrexpo has historically
operated with one of the lower costs of pelletising across the spectrum of
global iron ore pellet production, and therefore swing producers have tended
to moderate the pellet premium at times of low pricing, through removing
pellet supply from the market. The Group uses natural gas in its pelletising
operations and has had to operate below its nameplate capacity for a period of
2022 due to the ongoing war in Ukraine. As such, pelletising costs increased
to US$29 per tonne in 2022 (2021: approximately US$19 per tonne)(( 56
(#_ftn56) )). Despite this increase, the Group has managed to keep pelletising
costs below the prevailing pellet premium for the year.
The strategy of targeting low cost production is enhanced through Ferrexpo's
location in Ukraine, with the Ukrainian hryvnia having a close correlation to
commodity pricing, which therefore tends to devalue at times of low commodity
pricing, reducing the Group's cost base.
3.4. Freight rates (external risk)
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer and Chief Marketing Officer Low / Increasing 2, 3 and 5
The pricing of a bulk commodity, such as Ferrexpo's iron ore products,
typically includes a component of the net realised pricing that considers the
cost of transporting material to the customer. For Ferrexpo, this pricing
typically refers to either the C3 or C2 freight indices (published by the
Baltic Exchange), as these are reflective of the shipping cost for accessing
either the Asian or European market (respectively). Freight rates are a
deduction from the pricing received from the pellet, and therefore higher
freight rates will result in lower net realised pricing for the Group, and
vice versa.
The factors driving freight rates include the prevailing fuel cost for ships,
the availability of vessels at a given point in time, and insurance policies
required for ships to service the required route (the latter being a
significant factor for chartering parties looking to ship via the Black Sea
during the present time).
As a guide, the C3 freight index increased from below US$20 per tonne in early
2022, to over US$38 per tonne in May 2022, with this rise associated with the
war in Ukraine and rising energy costs. Freight rates declined to US$20 per
tonne towards the end of the year, and averaged US$24 per tonne for the full
year (2021: US$27 per tonne)(( 57 (#_ftn57) )).
Additionally, the war in Ukraine has had an effect on the Group's ability to
charter vessels with shipowners, as the closure of Ukraine's access to the
Black Sea has resulted in limited deliveries of the Group's iron ore pellets
to the seaborne market, with external factors impacting freight rates. Whilst
the increased costs associated with trading within the Black Sea have been
reflected in freight rates since the outset of the war in Ukraine, the Group
is still managing to charter vessels at market level due to the Group's strong
relationships with shipowners.
Further freight-related realised effects, or potential risks, of the war in
Ukraine include: an increase in the insurance premiums required for vessels
travelling to Black Sea ports (Ukrainian ports or otherwise), the potential
closure of the Bosphorus strait and the Black Sea potentially becoming
non-committal for shipowners.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO (see page 36), which may affect Ferrexpo's ability to conduct
business relationships with freight providers. Should third party concerns
relating to these matters prevent Ferrexpo from engaging in business
relationships with specific freight providers, then the Group may incur higher
costs relating to booking of freight from a smaller group of providers.
Risk mitigation
The Group has its own in-house freight manager, which helps the Group to
receive a competitive rate for freight cargoes. The Group's management team
includes freight specialists based in Singapore, where many shipping brokers
and owners are located, and it is therefore possible to maintain a detailed
understanding of both the global freight market and shipowners.
As a result of the Group's operations being located in Ukraine, seaborne
freight chartering has been reduced in 2022 (following Russia's closure of the
Black Sea to Ukrainian ports - see page 35 for more), and as such the Group
has increasingly relied on its European customer network for sales. Despite
this, the international freight rate is still relevant for the business, as
many contracts reference a quoted freight rate.
The Group currently does not enter into hedging arrangements for freight
rates, which is an approach consistent with the Group's strategy on other
forms of hedging. This approach is continually reviewed by the Group's
management team, and such arrangements may be entered into if it is deemed to
be beneficial to the Group.
The Group's freight department regularly monitors freight-related risks
associated with the war in Ukraine, or otherwise, with an aim of ensuring
effective decision making in light of changes to the operating landscape.
4. Operating risks
4.1. Risks relating to producing our products
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer, Chief Operating Officer and Chief Marketing Officer Medium / Increasing 2, 3 and 5
The Group's operations involve the mining of iron ore, which requires detailed
planning of blasting, excavation and transport operations, to deliver
sufficient quantities of iron ore to the Group's processing plant, which
crushes, grinds and beneficiates the material that it processes from native
iron ore grades (ranging approximately 25-30% Fe) to high grade concentrate
(either 65% or 67% Fe) for Ferrexpo's current product portfolio. Pelletising
operations then subsequently convert high grade iron ore concentrate to
pellets via a series of kilns that operate at approximately 1,300(o)C. The
above processes are complex and carry inherent risks as a result. The Group is
able to mitigate such risks through a range of activities and the collective
experience of the Group's executive management team, but it may not be
possible to eliminate all risk factors.
As a business with its main operating assets located in Ukraine, the Group has
faced significant risks relating to the ongoing war in Ukraine, which are
summarised in the Principal Risks shown on page 35 of this report. The Group
has also faced a number of indirect consequences of the war in its operations,
such as a number of skilled personnel departing Ferrexpo's operations to
either serve in the Armed Forces of Ukraine or relocating away from the
conflict, the Ukrainian authorities requiring the delivery of specific
equipment for military use (typically light vehicles), the reduced
availability of specific materials relevant for the conflict such as
detonators and fuel and restrictions on operating practices, such as scheduled
blasting of in-situ rock in mining operations.
Outside of risks that directly relate to the war in Ukraine, the Group faces
material risks relating to its mining operations that include (but are not
limited to) health and safety-related risks, the risk of a pit wall failure or
fall of ground incident in the Group's mines, equipment failure (either due to
operator oversight, failures in maintenance practices or failure despite
acceptable levels of maintenance), weather events preventing access to the
Group's mines, poor planning processes resulting in a lack of high grade iron
ore for processing, or the failure of drilling to identify the correct
location of ore and waste material. Risks in the processing plant, covering
the beneficiation and pelletisation of material, also include (but are not
limited to) equipment failure and/or unscheduled equipment downtime, a lack of
spare parts, a lack of key input materials, unsuitable equipment for
processing of certain ore types, operating restrictions and extreme weather
events (or other events potentially related to climate change) that may impact
the ability to produce or store the Group's products. As operations continue
to be modernised, the Group also faces cybersecurity-related risks from cyber
threats and other factors that may impair the Group's ability to operate its
electronic equipment - see page 47 for more details.
The risks described above are typically short-term events and the Group also
faces longer-term risks, such as climate change (see page 48) and country
risks related to Ukraine (see page 36). Potential risks related to climate
change are also detailed on pages 21 to 29 of this report, and have been
identified through the Group's recent collaboration with environmental
consultants Ricardo Plc.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO (see page 36), which may affect Ferrexpo's ability to source
key input materials and labour either within Ukraine or overseas. Should third
party concerns relating to these matters prevent Ferrexpo from engaging in
business relationships with specific providers of materials and/or labour,
then the Group may have challenges in its ability to produce, or incur higher
costs relating to the sourcing of the same inputs from a smaller group of
providers and/or smaller group of people.
Risk mitigation
The Group employs an experienced management team and has a management
structure in place to monitor, and where necessary, manage risks as and when
these risks escalate. The Group's business model is in a sector that has
inherent risk in the mining and processing of materials, with these risks
being manageable and, where possible, mitigation measures are utilised to
ensure the safe operation of the Group's facilities to ensure the efficient
production of the Group's iron ore products. The Group maintains a risk
register of more than 40 risk areas (as of January 2023), which is monitored
on a frequent basis by the Group's operational teams and reported to the
relevant management committees. Where an operational risk is deemed to be
sufficiently significant in terms of potential impact and/or likelihood,
appropriate risk mitigation measures are sought, often with the assistance of
third party specialists, where relevant.
4.2. Risks relating to delivering our products to customers
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer, Chief Operating Officer and Chief Marketing Officer Medium / Increasing 2, 3 and 5
The Group is a producer of a bulk commodity, meaning that its business model
relies on timely and consistent access to a logistics network with sufficient
capacity to transfer a large volume of material to the Group's customer base
around the world. Any interruption to the scale, availability or reliability
of this logistics network has the potential to significantly impact the
Group's ability to operate its business model and generate cash flow. The
nature of being a producer of a bulk commodity means that should an
interruption of logistics occur, there may be little time or excess funding
available to efficiently remedy the situation and/or stockpile excess
material, potentially resulting in a temporary suspension of the Group's
production facilities and an associated impact on the Group's ability to
generate revenues.
The Group's logistics network is diverse in nature, covering the Group's use
of the railway network in Ukraine and further afield across Europe, a stake in
a berth at a port facility in south west Ukraine (used for loading vessels for
the seaborne market), and an inland waterway logistics business along the
River Danube.
Examples of risks relating to the Group's logistics network, aside from those
specifically relating to the ongoing Russian invasion of Ukraine (covered on
page 35), range from those potentially impacting railway logistics, which
include (but are not limited to) the unexpected closure and/or suspension of
sections of the railway network in Ukraine or Europe required for deliveries,
a reduction in rail capacity related to the phasing out of outdated equipment
and insufficient investment in replacement equipment, potential political
interference in the Group's ability to book railway capacity and/or railway
wagons, extreme weather events (either related to climate change or otherwise)
and a lack of personnel to operate the railways effectively. The Group faces
similar risks relating to its use of inland waterway logistics on the River
Danube, and in addition includes risks relating to abnormally high and low
water levels, which may impede passage of vessels. Such risks are expected to
be exacerbated in the future by the potential impact of climate change.
Similar risks are posed to the Group and its ability to access seaborne
markets should extreme weather events (either climate change related or
otherwise) impact operations at the port of Pivdennyi or other ports used by
the Group, or shipping routes such as the Suez Canal.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO (see page 36), which may affect Ferrexpo's ability to secure
bookings on key logistics routes either within Ukraine or overseas. Should
third party concerns relating to these matters prevent Ferrexpo from engaging
in business relationships with specific logistics providers, then the Group
may incur difficulties in its ability to ship products, or may incur higher
costs relating to the sourcing of logistics options along alternative routes.
Risk mitigation
Since listing in 2007, the Group has sought to invest in its logistics
capabilities and overall capacity, to ensure cost effective and sufficient
access to a logistics network. This has involved the purchase of railcars,
with the Group now operating a fleet of 3,033 railcars (with this figure
increasing by 183 in 2022), which reduces operating costs and helps to ensure
product quality whilst pellets are in transit to customers. Similarly, the
Group owns a 49.9% stake in a berth at the port of Pivdennyi in south west
Ukraine, along with a trans-shipment vessel ("Iron Destiny"), which previously
enabled the Group to load trans-shipment vessels for the seaborne market. Iron
Destiny was outside of Ukrainian waters undergoing routine maintenance at the
time of Russia's invasion of Ukraine on 24 February 2022, therefore ensuring
that the Group still controls this asset. The Group also owns its inland
waterway logistics provider (First-DDSG), which is based in Vienna, Austria,
and has locations along the River Danube.
In order to maintain timely access to its logistics network, the Group also
maintains close working relationships with logistics providers such as the
Ukrainian railway operator, the port operator at Pivdennyi, as well as
government bodies in Ukraine that are relevant for the Group's logistics
operations.
4.3. Risks relating to health and safety
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer, Chief Operating Officer and Chief Human Resources Low / Increasing 1, 2, 3, 4 and 5
Officer
Without effective management of health and safety related risks, the nature of
mining and processing of iron ore into iron ore pellets can involve inherent
risks. The processes involved in the mining and processing of metalliferous
rock has progressed significantly in recent years, but risks remain if
policies and procedures are not followed correctly, or if equipment is not
used correctly.
Mining activities involve the use of large equipment, such as haul trucks,
excavators and bulldozers, with each item of equipment weighing a considerable
number of tonnes and which are expected to regularly move around to a number
of locations throughout a shift. The operation of mining equipment is
inherently dangerous if operators are not correctly trained, or if due care
and attention are not applied when operating each item of equipment.
Activities within a mine include the drilling and blasting of native rock,
excavation and transport of blasted rock to either the processing plant or
waste dumps, watering of surfaces to reduce dust emissions and the
construction of waste dumps to a specified design. Activities are typically
conducted 24 hours a day, and whilst the Group has extensive lighting on
equipment and around mining areas, low light conditions are a risk for
operators.
Risk mitigation
The Group has a well trained workforce, comprising 7,978 individuals and 1,796
contractors, with an extensive training programme. In 2022, the Group provided
6,143 training courses to employees, 64% of which were safety-related courses
(2021: 6,442 courses). The Group also trains contractors, as safety risks do
not vary according to an individual's contract status, with 170 safety-related
courses provided to contractors in 2022 (2021: 931 courses).
The Group's approach to mitigating safety risks is to understand the causal
factors of safety incidents, through creating risk registers for each activity
being undertaken or area within the Group's main operations. The Group also
records leading indicators of safety, with an aim to monitor and improve these
factors, to reduce the risk of a safety-related incident occurring. Examples
of leading indicators include the number of: training courses undertaken, high
visibility safety tours by senior managers, safety inspections and hazard
reports completed. In the instance of a safety-related event occurring, the
Group aims to learn for each event, to reduce the risk of a repeat occurrence.
Lagging indicators of safety help the Group's management team to record the
effectiveness of safety measures being implemented, and the main indicators
used to track performance are the Group's lost time injury frequency rate
("LTIFR"), total recordable injury frequency rate and fatalities.
Throughout its operations, the Group is seeking to implement modern forms of
technology, including autonomous equipment, which help to remove operators
from hazardous working environments. Examples of such would be the Group's
autonomous trucks in the Yeristovo mine.
4.4. Risks relating to operating costs
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer and Low / Increasing 2 and 5
Chief Financial Officer
The Group's business comprises a number of open-pit mining operations, an iron
ore processing complex and a range of ancillary activities related to the
production of iron ore pellets and concentrate, which requires a range of
input goods and services. The Group's costs are subject to a range of factors,
some of which are controlled by the Group, whilst others are outside of the
Group's control, meaning that resulting profitability may fluctuate.
The Group operates in an energy intensive industry, and therefore requires a
range of commodity-based inputs such as diesel and natural gas, as well as
electricity, which are all subject to market factors outside of Ferrexpo's
control that will influence the Group's overall profitability. Examples of
such would be the movement of natural gas prices in 2022, which rose as a
consequence of Russia's invasion of Ukraine from less than US$600 per thousand
cubic metres in 3Q 2021, to a peak of more than US$1,200 per thousand cubic
metres in 1Q 2022, before declining to below US$900 per thousand cubic metres
in 4Q 2022.
Further to energy costs, inflationary pressures were seen on a global scale in
2022, with Ukraine no exception. Cost inflation has the potential to affect a
wide range of the Group's input costs at its operations, with the Group
potentially not able to effectively counter such pressures due to the
benchmark pricing of the Group's products.
A primary cause of cost inflation has been the Group's inability to operate at
its nameplate capacity due to the war in Ukraine, resulting in higher unit
costs. Additionally, inflationary pressures have been seen on a global basis
in 2022, which are reflected in energy prices, capital costs for equipment and
maintenance costs. Inflation in Ukraine in 2022 was estimated by the
government of Ukraine to be 26.6%(( 58 (#_ftn58) )) (2021: 9.4%(( 59
(#_ftn59) ))), reflecting the exceptional circumstances experienced in 2022.
Given that the Russian invasion of Ukraine remains ongoing, it is expected
that the negative impacts of the war will continue to be experienced by the
Group, such as lower production and higher unit costs.
The use of natural gas is a key component of the Group's pelletising
operations and its use is therefore essential for the production of iron ore
pellets.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO (see page 36), which may affect Ferrexpo's ability to source
key input materials and labour either within Ukraine or overseas. Should third
party concerns relating to these matters prevent Ferrexpo from engaging in
business relationships with specific providers of materials and/or labour,
then the Group may incur difficulties in its ability to produce, or incur
higher costs relating to the sourcing of the same inputs from a smaller group
of providers and/or smaller group of people.
Risk mitigation
The Group has operated through a number of commodity cycles and the Group's
operations have been in production for more than 50 years, and through this
experience of operating, the Group's management team has developed an
understanding of cost effective production and the required level of goods and
services to maximise the Group's profitability at any given level of
production.
The Group has a number of measures in place to reduce and minimise operating
costs, where possible, to ensure that the Group maintains its profitability
throughout the commodity cycle. For input goods that are a requirement of the
production of pellets, the Group aims to minimise use and develop alternative
materials (substitutes) for use in the Group's operations, which would help
reduce reliance on a single input (or limited number of inputs), and therefore
reduce risks relating to the cost and supply of individual inputs. As an
example, a partial substitute would be the use of sunflower husks in the
Group's pelletiser, which is used to fuel the pelletiser. In 2022, the Group
successfully sourced 21% of the pelletiser's heating energy from sunflower
husks (2021: 18%). Other examples of substitution of goods within the Group's
operations include the use of different manufacturers of mining equipment,
with different suppliers of spare parts, which reduces operational risks and
can reduce operational costs.
4.5. Risks relating to information technology ("IT") systems and cybersecurity
Responsibility Risk appetite / Change Link to strategy
Chief Executive Officer Low / Increasing 1, 2 and 3
The Group is increasingly reliant on modern technology for the safe, efficient
and cost effective production of its products. With IT systems becoming
increasingly more important to the Group's business model, the risks
associated with IT security and the continued availability of IT systems have
increased in recent years, particularly in light of the increased complexity
of cyberattacks on IT systems. Cybersecurity threats may take the form of, but
are not limited to: malware, ransomware, phishing, denial-of-service attacks,
and password attacks.
Cyberattacks, such as malware and ransomware, are often unreported in the
mainstream media by companies and governments to avoid negative publicity. It
is therefore difficult to ascertain the full extent to which the Group is
facing cybersecurity risks. In the past, published cyberattacks affecting
companies and governments have closed or limited a company's ability to
produce, or have withheld or disclosed confidential information, and have
withheld access to key operational infrastructure.
The Group is exposed to heightened risks related to cybersecurity at the
present time given Russia's ongoing invasion of Ukraine, which is a conflict
taking place in a number of environments, including attacks on IT systems in
Ukraine. Attacks can be expected on any IT system in Ukraine as a result of
the conflict, and therefore, organisations such as Ferrexpo may be the target
of an attack due to its location, rather than its business activities.
Consequently, it is difficult for the Group to predict the source, scale or
nature of any cyberattack, which may appear random in nature.
Risk mitigation
The Group's IT department conducts regular reviews of the general IT landscape
and provides regular cyber awareness training for employees as well as ad hoc
notification when new threats are identified. The Group also regularly reviews
requirements on data protection, with email security bulletins circulated to
ensure internal IT users are provided with up-to-date information on
cybersecurity. The Group has also implemented a dynamic approach to
anti-malware policies, to ensure an adaptive approach for new threats as they
emerge.
Efforts in 2022 have had a focus on finalising an extensive third party audit
(ISO 2700x, "Information Security Standards") of cybersecurity and internal
IT/automation processes. This audit had previously commenced in 2021, with a
number of findings identified early on during the war in Ukraine in 2022 that
helped to mitigate threats, which was achieved in part through members of the
audit team acting as a "red team". As a result of this audit, immediate
mitigation actions were taken across the Group's IT equipment and
infrastructure, including upgrades to the latest standards. Purchases of
specific software and hardware were made in 2022, with deployment to enhance
cybersecurity.
In parallel, the Group has had to respond to the possibility of cyberwarfare
and conventional warfare tactics, with the commissioning of additional IT
infrastructure in bomb shelters a good example of that response. Other
examples include the deployment of extensive power control systems, and urgent
upgrades and migrations due to vulnerabilities.
Further to existing practices and protocols, the Group regularly updates the
software and hardware in use throughout its business, to reduce the Group's
exposure to known weaknesses in cybersecurity.
5. Risks relating to climate change
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Low / Increasing 1, 2, 3, 4 and 5
Climate change represents a significant challenge for the modern world, with
governments, business organisations, communities and individuals around the
world seeking to adapt to a low-emissions future.
Climate change poses a number of physical and transition risks as the world
seeks to reduce emissions and its reliance on technologies and activities that
are relatively intensive for the emission of greenhouse gases. Physical risks
are those that affect the physical environment - such as (but not limited to)
increased heat events, prolonged droughts and low water levels, dust
emissions, and the increased severity of precipitation events. Transition
risks are those that relate to society's shift to a low emissions future, such
as reputational risks and the risk of technologies becoming redundant in a
low-emissions future, amongst other potential effects. A review of potential
climate change related risks was conducted as part of the work carried out
with environmental consultants Ricardo Plc in 2022, with this work detailed in
the Group's Climate Change Report. A materiality assessment as part of this
work identified the following as the main risk areas facing Ferrexpo: (a)
demand for low carbon emissions steelmaking, (b) shipping: targets and
regulations on carbon emissions and (c) carbon pricing/tax: targets and
regulations on carbon emissions. Further details of the work completed in
collaboration with Ricardo Plc are available in Ferrexpo's Climate Change
Report on the Group's website (www.ferrexpo.com).
At this stage in the global development curve on climate change science and
decarbonisation efforts, there is a heightened degree of stakeholder focus on
decarbonisation efforts. Given this focus, there is an associated expectation
of progress being made that may not match the availability of relevant
technology and equipment, or the financial viability of any technology, and
therefore there is a risk of rising stakeholder concern if a company's
decarbonisation plans and/or targets are not effectively communicated, or are
deemed insufficient. Should stakeholders require further action or increased
efforts for decarbonisation of a business, this may create additional
financial, operational and reputational risks for the business.
Risk mitigation
The Group understands the importance of climate change, both in its impact on
the business, as well as the Group's potential impact on climate change. The
Group aims to reduce its emissions over time and has set a series of reduction
targets for its greenhouse gases (principally carbon dioxide) for the medium
and long term (2030 and 2050 respectively). In December 2022, the Group
published its inaugural standalone Climate Change Report, which represents the
first phase of work completed with environmental specialists Ricardo Plc. This
report details a number of measures that the Group is either utilising today
to reduce emissions, or plans to use in the future, in order to achieve these
emissions targets. The full report is available on the Group's website
(www.ferrexpo.com).
The Group has a streamlined approach to reducing emissions, focusing where
possible on activities that generate the greatest emissions, as well as
identifying low cost solutions that may reduce the Group's activities. The
main source of the Group's overall emissions (being Scopes 1, 2 and 3
collectively) is the downstream use of iron ore pellets in steelmaking, which
accounted for 85% of total emissions in the Group's baseline year of 2019. In
order to reduce this aspect of emissions, the Group is increasing its focus on
production of direct reduction ("DR") pellets, which are used in an
alternative method of steelmaking (the direct reduced iron - electric arc
furnace process), which results in DR pellets generating 49% lower emissions
when converted to steel, compared to the Group's blast furnace pellets, as
assessed by independent consultants CRU.
With regard to Scope 1 and 2 emissions, the Group has initiated a number of
projects to reduce these categories of emissions. The project yielding the
greatest impact is the Group's clean power purchasing strategy, which has
resulted in Scope 2 emissions falling by 52% since 2019, helping to deliver a
31% saving in Scope 1 and 2 emissions combined. In addition, the Group is
studying the electrification of its mining fleet and use of green hydrogen in
the Group's pelletiser, with diesel and natural gas representing 80% of the
Group's Scope 1 emissions in 2022 (2021: 85%).
Through these projects, the Group aims to produce iron ore pellets on a net
zero basis by 2050. For further details of the net zero pathway identified
through working with Ricardo Plc, as well as the Group's carbon emissions
reduction targets, please see the Group's Climate Change Report for 2022 on
the Group's website (www.ferrexpo.com (http://www.ferrexpo.com) ).
6. Risks relating to the global Covid-19 pandemic
Responsibility Risk appetite / Change Link to strategy
Board of Directors and Chief Executive Officer Low / Decreasing 1, 2, 3, 4 and 5
The global Covid-19 pandemic continues to affect communities around the world,
with varying levels of infection in different countries resulting in a range
of Covid-19 related measures in place with local and regional governments,
which may impact the Group's ability to do business in individual countries,
or conduct cross-border trade. Whilst governments around the world are
gradually reducing Covid-19 related measures and restrictions, there are
reports of elevated infection rates in a number of countries, particularly
those that have recently reopened and/or have relatively low vaccination rates
in sections of society, such as the elderly or specific regions within a
country. The Covid-19 virus has demonstrated an ability to mutate into
different strains and therefore it should be considered a risk that an as-yet
unknown variant of Covid-19 may emerge that has the potential to significantly
impact communities to a greater extent than previous variants.
As a business operating in Ukraine, Russia's continued invasion of Ukraine in
2022 has resulted in significantly lower testing for Covid-19 and as a result
infection rates are largely unknown at the present time. As such, without
widespread testing or active measures to prevent transmission, the spread of
the Covid-19 virus in Ukraine represents a potential risk, particularly if
more transmissible and/or severe strains of this virus were to emerge in the
near term. Given the focus of the government on the defence of its territorial
integrity, it is unlikely that testing and/or preventative measures will
resume until the war in Ukraine de-escalates or a ceasefire is called. The
Group may therefore be required to increase its efforts to monitor and test
for infections amongst its workforce, and increase efforts to assist local
authorities with a community testing programme, should rates of infection
increase and/or the impact of individual infections become more severe. Whilst
the response to Covid-19 by both the Group and local authorities was proactive
prior to the war in Ukraine commencing in February 2022, it should be expected
that the response to Covid-19 may be now more reactive in nature, and
therefore any impact of infections in the Group's workforce and/or local
communities may be felt to a greater extent before counter-measures are
successfully initiated to aid affected individuals and reduce infection rates.
Risk mitigation
The Group has maintained a number of Covid-19 measures that were introduced in
2020 and were successful in the Group maintaining low rates of infection at
its operations in 2020 and 2021. Such measures include social distancing, mask
wearing (where relevant) and electronic cameras capable of measuring an
individual's body temperature. The Group maintains the ability to reintroduce
other measures, such as changes to the timing of shift patterns, the
dissemination of food outside of canteens and widespread testing of employees
and contractors, should the risks associated with Covid-19, or the impact of
infections, increase to a material level of impact on the business.
The Group has also continued to support the local authorities' efforts to
vaccinate the local population, including the Group's workforce. As of
February 2022, over 6,000 of the Group's employees in Ukraine (out of a total
employee workforce of 7,850) had received a single dose of a Covid-19
vaccination and over 5,400 had received a second dose. Following the outbreak
of war in Ukraine, reporting of Covid-19 vaccinations has been reduced
however.
The Group continues to support medical institutions in local communities
through the Ferrexpo Charity Fund, which has been in operation for more than
11 years and represents one of the main avenues for the Group to provide
direct community support (other avenues include direct support provided by the
Group's own operating subsidiaries, FPM, FYM and FBM). Further details of
community support funding are provided on page 30 of this report.
Statement of Directors' Responsibilities
Statement by the Directors under the UK Corporate Governance Code
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare such financial statements for
each financial year. Under that law the Directors are required to prepare the
Group financial statements in accordance with International Financial
Reporting Standards as adopted in the United Kingdom ("UK adopted IFRS") and
have also chosen to prepare the Parent Company financial statements in
accordance with the United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure
Framework, and applicable law).
Under company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Parent Company and of their profit or loss for
that period.
In preparing the financial statements, the Directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable UK adopted International Financial
Reporting Standards have been followed for the Group financial statements and
United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure
Framework have been followed, subject to any material departures disclosed and
explained in the financial statements; and
· prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's and Parent Company's transactions
and disclose with reasonable accuracy at any time the financial position of
the Group and Parent Company and enable them to ensure that its financial
statements comply with the Companies Act 2006. The Directors are also
responsible for safeguarding the assets of the Group and Parent Company and
for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in respect of the Annual Report and
Accounts
We confirm that to the best of our knowledge:
a) the Group financial statements, prepared in accordance with UK adopted
IFRS, give a true and fair view of the assets, liabilities, financial position
and profit of the Company and the subsidiary undertakings included in the
consolidation taken as a whole and attention is drawn to the material
uncertainty in terms of the Group's ability to continue as a going concern in
Note 2 Basis of preparation of the Consolidated Financial Statements on page
57;
b) the Parent company financial statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising FRS 101
Reduced Disclosure Framework, give a true and fair view of the Company's
assets, liabilities and financial position of the Parent Company;
c) the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and the subsidiary
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
d) the Annual Report and financial statements, taken as a whole, is fair,
balanced and understandable, and provides the information necessary for
shareholders to assess the Group's and Company's position, performance,
business model and strategy.
This responsibility statement was approved by the Board of Directors on 14
March 2023 and is signed on its behalf by:
Lucio Genovese
Chair
Jim North
Chief Executive Officer
14 March 2023
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF
FERREXPO PLC ON THE PRELIMINARY ANNOUNCEMENT OF FERREXPO PLC
As the independent auditor of Ferrexpo Plc we are required by UK Listing Rule
LR 9.7A.1 (2) to agree to the publication of Ferrexpo Plc's preliminary
statement of annual results for the year ended 31 December 2022.
The preliminary statement of annual results for the year ended 31 December
2022 includes the 2022 full year results and the disclosures required by the
Listing rules including:
· Financial Highlights and 2022 Financial Summary;
· Chair's Statement;
· Management commentary included under the following headings;
Ferrexpo's Response to COVID-19, Market Review, Financial Review, Operations
Review, Growth Plans, HSEC's Chair Review, Health and Safety Review, Climate
Change, TCFD Reporting, Workforce Development and Inclusion, Community Support
and Development, Corporate Governance, Risk Management, Responsible Business
and Principal Risks Sections;
· Statement of Directors' Responsibilities;
· Consolidated Income Statement;
· Consolidated Statement of Comprehensive Income;
· Consolidated Statement of Financial Position ;
· Consolidated Statement of Cash Flows;
· Consolidated Statement of Changes in Equity;
· Notes to the Consolidated Financial Statements; and
· Alternative Performance Measures.
The Directors of Ferrexpo Plc are responsible for the preparation,
presentation and publication of the preliminary statement of annual results in
accordance with the UK Listing Rules.
We are responsible for agreeing to the publication of the preliminary
statement of annual results, having regard to the Financial Reporting
Council's Bulletin "The Auditor's Association with Preliminary Announcements
made in accordance with the requirements of the UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Ferrexpo plc for the year
ended 31 December 2022 is complete and we signed our auditor's report on 14
March 2023. Our auditor's report is not modified although it includes a
separate section in respect of a material uncertainty related to going
concern.
Procedures performed to agree to the preliminary announcement of annual
results
In order to agree to the publication of the preliminary announcement of annual
results of Ferrexpo Plc we carried out the following procedures:
· Confirmed that the preliminary statement includes the
minimum information required by the Listing Rules.
· Checked that the figures in the preliminary statement have
been accurately extracted from the audited financial statements.
· Checked the consistency of presentation of the financial
information in the preliminary statement with the audited financial
statements.
· Read management commentary, the financial information in the
consolidated financial statements and notes thereof and considered if the
management commentary is:
· Fair, balanced and understandable
· Materially consistent with the financial statements and with
the contents of the annual report
· Consistent with the information and our knowledge obtained
in the course of the audit of the financial statements of Ferrexpo Plc for the
year ended 31 December 2022.
· Considered if for Alternative Performance Measures (APMs)
and associated narrative:
· APMs are clearly defined and have been given meaningful
labels
· The use and relevance of APMs is explained
· APMs have been reconciled to the most relevant figures in
the financial statements
· Comparatives have been included
· Considering whether the financial information in the
preliminary announcement is misstated, either because it is stated incorrectly
or because it is presented in a misleading manner.
Rakesh Shaunak FCA
Senior Statutory Auditor
For and on behalf of MHA MacIntyre Hudson,
Statutory Auditor
London
14 March 2023
Consolidated Income Statement
US$000 Notes Year ended Year ended
31.12.21
31.12.22
Revenue 4 1,248,490 2,518,230
Operating expenses 3/5 (1,192,046) (1,411,911)
Other operating income 9,233 9,499
Operating foreign exchange gains/(losses) 6 339,439 (37,808)
Operating profit 405,116 1,078,010
Share of profit from associates 557 4,468
Profit before tax and finance 405,673 1,082,478
Finance income 7 929 637
Finance expense 7 (4,446) (8,940)
Non-operating foreign exchange losses 6 (63,497) (3,200)
Profit before tax 338,659 1,070,975
Income tax expense 8 (118,662) (199,982)
Profit for the year 219,997 870,993
Profit attributable to:
Equity shareholders of Ferrexpo plc 219,995 870,987
Non-controlling interests 2 6
Profit for the year 219,997 870,993
Earnings per share:
Basic (US cents) 9 37.41 148.2
Diluted (US cents) 9 37.35 147.9
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
US$000 Notes Year ended Year ended
31.12.22 31.12.21
Profit for the year 219,997 870,993
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations (664,296) 82,196
Income tax effect 8 13,036 (3,313)
Net other comprehensive (loss)/income that may be reclassified to profit or (651,260) 78,883
loss in subsequent periods
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension liability 5,336 9,882
Net other comprehensive income not being reclassified to profit or loss in 5,336 9,882
subsequent periods
Other comprehensive (loss)/income for the year, net of tax (645,924) 88,765
Total comprehensive (loss)/income for the year, net of tax (425,927) 959,758
Total comprehensive (loss)/income attributable to:
Equity shareholders of Ferrexpo plc (425,919) 959,778
Non-controlling interests (8) (20)
(425,927) 959,758
Consolidated Statement of Financial Position
US$000 Notes As at As at
31.12.22 31.12.21
Assets
Property, plant and equipment 10 807,861 1,216,693
Right-of-use assets 6,342 7,776
Goodwill and other intangible assets 11 8,249 43,586
Investments in associates 5,167 7,034
Inventories 12 6,277 8,414
Other non-current assets 37,451 96,484
Deferred tax assets 8 14,471 32,946
Total non-current assets 885,818 1,412,933
Inventories 12 224,454 202,399
Trade and other receivables 24,699 192,363
Prepayments and other current assets 13,352 68,162
Income taxes recoverable and prepaid 8 4,674 636
Other taxes recoverable and prepaid 88,762 48,040
Cash and cash equivalents 13 112,945 167,291
Total current assets 468,886 678,891
Total assets 1,354,704 2,091,824
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (2,636,891) (1,986,131)
Retained earnings 3,580,329 3,510,793
Equity attributable to equity shareholders of Ferrexpo plc 1,250,178 1,831,402
Non-controlling interests 67 75
Total equity 1,250,245 1,831,477
Interest-bearing loans and borrowings 3/14 1,354 2,143
Defined benefit pension liability 16,456 26,074
Provision for site restoration 4,284 3,873
Deferred tax liabilities 8 1,347 141
Total non-current liabilities 23,441 32,231
Interest-bearing loans and borrowings 3/14 5,194 48,206
Trade and other payables 30,509 72,824
Accrued and contract liabilities 19,593 52,613
Income taxes payable 8 20,564 37,138
Other taxes payable 5,158 17,335
Total current liabilities 81,018 228,116
Total liabilities 104,459 260,347
Total equity and liabilities 1,354,704 2,091,824
The financial statements were approved by the Board of Directors and
authorised for issue on 14 March 2023 and signed on behalf of the Board.
Lucio Genovese
Jim North
Non-executive Chair
Chief Executive Officer & Executive Director
Consolidated Statement of Cash Flows
US$000 Notes Year ended Year ended
31.12.22 31.12.21
Profit before tax 338,659 1,070,975
Adjustments for:
Depreciation of property, plant and equipment, right-of-use assets and 10/11 96,977 115,111
amortisation
of intangible assets
Finance expense 7 1,675 5,729
Finance income 7 (929) (637)
Losses on disposal and liquidation of property, plant and equipment 5 1,665 4,695
Write-offs and impairments 5 260,308 235,618
Share of profit from associates (557) (4,468)
Movement in allowance for doubtful receivables 6,729 690
Movement in site restoration provision 1,578 551
Employee benefits 3,745 4,936
Share-based payments 490 856
Operating foreign exchange (gains)/losses 6 (339,439) 37,808
Non-operating foreign exchange losses 6 63,497 3,200
Other adjustments - (4,914)
Operating cash flow before working capital changes 434,398 1,470,150
Changes in working capital:
Decrease/(increase) in trade and other receivables 210,267 (102,827)
Increase in inventories (90,385) (65,170)
(Decrease)/increase in trade and other payables (incl. accrued and contract (55,529) 40,186
liabilities)
Increase in other taxes recoverable and payable (incl. VAT) (84,110) (11,073)
Cash generated from operating activities 414,641 1,331,266
Interest paid (918) (7,031)
Income tax paid 8 (110,243) (227,930)
Post-employment benefits paid (2,220) (2,475)
Net cash flows from operating activities 301,260 1,093,830
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets 10 (161,010) (360,869)
Proceeds from disposal of property, plant and equipment and intangible assets 103 1,030
Interest received 894 583
Dividends from associates 711 3,967
Net cash flows used in investing activities (159,302) (355,289)
Cash flows from financing activities
Proceeds from loans and borrowings 14 - 42,146
Repayment of loans and borrowings 14 (42,209) (257,430)
Principal elements of lease payments 14 (5,786) (5,517)
Dividends paid to equity shareholders of Ferrexpo plc 9 (155,095) (619,377)
Net cash flows used in financing activities (203,090) (840,178)
Net decrease in cash and cash equivalents (61,132) (101,637)
Cash and cash equivalents at the beginning of the year 167,291 270,006
Currency translation differences 6,786 (1,078)
Cash and cash equivalents at the end of the year 13 112,945 167,291
Consolidated Statement of Changes in Equity
Attributable to equity shareholders of Ferrexpo plc
US$000 Issued capital Share premium Other reserves Retained Total Non-controlling interests Total
earnings
capital and reserves equity
At 1 January 2021 121,628 185,112 (2,065,896) 3,250,534 1,491,378 95 1,491,473
Profit for the year - - - 870,987 870,987 6 870,993
Other comprehensive income/(loss) - - 78,909 9,882 88,791 (26) 88,765
Total comprehensive income/(loss) for the year - - 78,909 880,869 959,778 (20) 959,758
Share-based payments - - 856 - 856 - 856
Equity dividends to shareholders of Ferrexpo plc − - - (620,610) (620,610) - (620,610)
At 31 December 2021 121,628 185,112 (1,986,131) 3,510,793 1,831,402 75 1,831,477
Profit for the year − − − 219,995 219,995 2 219,997
Other comprehensive (loss)/income − − (651,250) 5,336 (645,914) (10) (645,924)
Total comprehensive (loss)/income for the year − − (651,250) 225,331 (425,919) (8) (425,927)
Share-based payments − − 490 − 490 − 490
Equity dividends to shareholders of Ferrexpo plc (Note 9) − − − (155,795) (155,795) − (155,795)
At 31 December 2022 121,628 185,112 (2,636,891) 3,580,329 1,250,178 67 1,250,245
Although accounts are published in US dollars and dividends are declared in US
dollars, the shares are denominated in UK pounds sterling and dividends are
therefore paid in UK pounds sterling. See Note 9 Earnings per share and
dividends paid and proposed for dividends paid during the year.
Notes to the Consolidated Financial Statements
Note 1: Corporate information
The financial information set out in this statement does not constitute
statutory accounts as defined in section 435 of the Companies Act 2006. This
set of financial results was approved by the Board on 14 March 2023. The
financial information for the years ended 31 December 2022 and 31 December
2021 has been extracted from the statutory accounts for each year.
The auditors' report on the 2022 statutory accounts was (i) unqualified, (ii)
included a separate section with regard to a material uncertainty related to
going concern, in respect of which the report was not qualified and (iii) did
not contain statements under section S498(2) or S498(3) of the Companies Act
2006. The audited statutory accounts for the year ended 31 December 2021 have
been delivered to the Registrar of Companies.
Ferrexpo plc will publish on or around 30 March 2023 its Annual Report and
Accounts for the year ended 31 December 2022 on its corporate website
www.ferrexpo.com. The audited statutory accounts for the year ended 31
December 2022 will be delivered to the Registrar of Companies following the
Company's annual meeting convened for 25 May 2023.
Organisation and structure
Ferrexpo plc (the "Company") is incorporated and registered in England, which
is considered to be the country of domicile, with its registered office at 55
St James's Street, London SW1A 1LA, UK. The Company is listed on the London
Stock Exchange and is a member of the FTSE 250 Index. Ferrexpo plc and its
subsidiaries (the "Group") operate two mines and a processing plant near
Kremenchug in Ukraine, have an interest in a port in Odessa and sales and
marketing activities around the world including offices in Switzerland, Dubai,
Japan, China, Singapore and Ukraine. The Group also owns logistics assets in
Austria, which operate a fleet of vessels operating on the Rhine and Danube
waterways and an ocean-going vessel, which provides top-off services. The
Group's operations are vertically integrated from iron ore mining through to
iron ore concentrate and pellet production and subsequent logistics. The
Group's mineral properties lie within the Kremenchug Magnetic Anomaly and are
currently being extracted at the Gorishne-Plavninske-Lavrykivske ("GPL") and
Yerystivske deposits.
Despite the ongoing war in Ukraine, the Group has managed to continue its
operations, although on a significantly lower level. The Group had first to
redesign its mining and processing plans in order to align them to available
logistics network for the sales to its customers in the different markets. In
the last quarter of the financial year 2022, after the intensified Russian
attacks on the critical infrastructure in Ukraine, the Group's production was
also dependent on the available power supply. The war continues to pose a
threat to the Group's mining, processing and logistics operations within
Ukraine. See Note 2 Basis of preparation, Note 4 Revenue and Note 10 Property,
plant and equipment for further information.
The largest shareholder of the Group is Fevamotinico S.a.r.l.
("Fevamotinico"), a company incorporated in Luxembourg. Fevamotinico is
ultimately wholly owned by The Minco Trust, of which Kostyantin Zhevago and
two other members of his family are the beneficiaries. At the time this report
was published, Fevamotinico held 49.5% (2021: 50.3%) of Ferrexpo plc's issued
voting share capital (excluding treasury shares).
Note 2: Basis of preparation
Whilst the preliminary announcement has been prepared in accordance with
International Financial Reporting Standards ("IFRS") adopted for use in the
United Kingdom ("UK adopted IFRS") and with the Companies Act 2006, as
applicable to companies reporting under international accounting standards,
this announcement does not itself contain sufficient information to comply
with IFRS. The Board approved the full financial statements that comply with
IFRS on 14 March 2023. The financial statements have been prepared under the
historical cost convention as modified by the recording of pension assets and
liabilities and the revaluation of certain financial instruments.
The Group's principal risks likely to affect its future development,
performance and position are set out on pages 34 to 49. The financial position
of the Group, its cash flows, liquidity position and borrowing facilities are
described in the Financial Review on pages 11 to 14.
Going concern
As at the date of the approval of these consolidated financial statements, the
war in Ukraine that commenced with the Russian invasion into Ukraine on 24
February 2022 is still ongoing. Even though the Group managed to operate
throughout the financial year 2022, albeit at a much lower capacity, the
situation in the country continues to pose a threat to the Group's mining,
processing and logistics operations and represents a material uncertainty in
terms of the Group's ability to continue as a going concern.
The material uncertainty is predominantly related to the recent level of
supply of power to the Group's operations in Ukraine, compounded by the risks
to the health, safety and wellbeing of the Group's workforce, the Group's
ability to operate its assets, the supply of key input materials required for
the production process and the provision and availability of logistics
capacity required for the delivery of the Group's products to customers in its
key markets, as outlined in more detail in the Principal risks on pages 34 to
49. These risks might have an adverse impact on the Group's cash generation
during the period covered by the going concern assessment. As announced on 11
October 2022, the Group had to temporarily suspend its production of iron ore
pellets as a result of Russian missile strikes on state-owned electrical
infrastructure. Although the Group restarted production in December 2022, the
level of the production remains dependent on Russian attacks on critical
infrastructure in Ukraine, which affects the level of supply of power. In
addition to the supply of power, the Group's operation continues to be
adversely affected by the fact that the Group's seaborne sales through the
port of Pivdennyi are still suspended as Ukraine's Black Sea ports are closed
as a result of the Russian invasion. Therefore, the Group currently operates
between one and two of its four pelletiser lines based on the available
guaranteed supply of power and in order to align production volumes to meet
the volume of sales that are currently accessible to the Group.
As at 31 December 2022, the Group had produced 6,053 thousand tonnes of iron
ore pellets, representing a decrease of 46% compared to the comparative year
ended 31 December 2021, and sold 6,183 thousand tonnes of its products,
compared to 11,350 thousand tonnes during the comparative year.
Despite this unprecedented and challenging situation during the financial year
2022, the Group's net cash position has only decreased from US$116,942 at the
beginning of the year thousand to US$106,397 thousand as of 31 December 2022,
demonstrating that the Group managed to adjust its business operation to the
new environment in order to preserve the available liquidity as much as
possible. As at the date of the approval of these consolidated financial
statements, the Group is in a net cash position of approximately US$114,600
thousand with an available cash balance of approximately US$120,400 thousand.
In addition to the available cash balance, the Group has an outstanding trade
receivable balance of approximately US$34,100 thousand from its pellet and
concentrate sales in January and February 2023, which are expected to be
collected in the next few weeks.
In addition to the outstanding trade receivable balance and as a result of the
congestions at the different border crossings relevant to the Group, pellet
volumes at a value of approximately US$21,300 thousand loaded on rail cars are
waiting for the border crossing. The revenue for these volumes will only be
recognised upon the border crossing when control is passed to the customer.
The Group's finished goods inventory, including the volumes subject to border
crossing, is 555 thousand tonnes as of 31 December 2022, compared to 568
thousand as of 31 December 2021, and is expected to reduce over time once the
logistics constraints within Ukraine ease.
As part of management's going concern assessment, the Group continuously
adjusts its long-term model in order to reflect the latest developments in
terms of possible production and sales volumes as well as latest market prices
and production costs, which are adversely affected by lower production
volumes. This long-term model is also used for the impairment test of the
Group's non-current operating assets and the key assumptions used when
preparing this model are disclosed in Note 10 Property, plant and equipment on
pages 66 and 67.
The latest base case of the long-term model shows that the Group has
sufficient liquidity to continue its operations at a reduced level for the
entire period of the management's going concern assessment, covering a period
of 18 months from the date of the approval of these consolidated financial
statements, even allowing for reasonably possible or plausible adverse changes
in respect of realised prices, lower production and sales volumes as well as
higher production costs. This base case assumes a production and sales volume
of 50% and 75% below the pre-war level for the financial years 2023 and 2024,
before recovering in 2025 to pre-war levels. However, as mentioned above, the
production and sales volumes are heavily dependent on the level of supply of
power as well as the logistics network available to the Group. The
sensitivities prepared for reasonable adverse changes show tighter available
liquidity under some scenarios, but sufficient available liquidity to operate
as planned for the next 18 months.
The Group also prepared reverse stress tests for more severe adverse changes,
such as a combination of all reasonably possible or plausible adverse changes
in respect of realised prices and production costs, which is unlikely to
happen in combination as a result of the natural hedge of iron ore prices and
prices for key input materials, as well as lower production and sales volumes,
but also for a further delay of the full recovery by another year. The stress
test for the most severe adverse changes shows that the Group would have
depleted all its liquidity by the end of the financial year 2023, without
making use of any available mitigating actions within its control, such as
further reductions of uncommitted development capital expenditures and
operating costs. The use of these mitigating actions would allow the Group to
be cash positive for almost 18 months after the approval of these consolidated
financial statements.
The Group has assessed that, taking into account:
i) its available cash and cash equivalents;
ii) its cash flow projections, adjusted for the effects caused by the war in
Ukraine, for the period of management's going concern assessment covering a
period of 18 months from the date of the approval of these consolidated
financial statements; and
iii) the feasibility and effectiveness of all available mitigating actions
within the Group management's control for identified uncertainties,
a material uncertainty still remains as some of the uncertainties remain
outside of the Group management's control, with the duration and the impact of
the war still unable to be predicted at this point of time.
As at the date of the approval of these consolidated financial statements, the
Group's operations, located adjacent to the city of Horishni Plavni, have not
been directly targeted by Russian missile strikes, but this remains a risk.
Should the area surrounding the Group's operations become subject to the armed
conflict, there would be a significant risk posed to the safety of the Group's
workforce and the local community, as well as a significant risk to key assets
and the infrastructure required for the Group to operate effectively. See the
update on the Group's Principal Risks section on pages 35 and 36 for further
information.
Considering the current situation of the war in Ukraine, all identified
available mitigating actions addressing the uncertainties caused by the war,
as outlined on pages 35 and 36, and the results of the management's going
concern assessment, the Group continues to prepare its consolidated financial
statements on a going concern basis. However, many of the identified
uncertainties are outside of the Group management's control and are of
unpredictable duration and severity, which may cast significant doubt upon the
Group's ability to continue as a going concern.
In addition to the war-related uncertainties described above, the Group is
also exposed to the risks associated with operating in a developing economy,
which may or may not be exacerbated by the war and/or the current
circumstances facing the Group's controlling shareholder (see Ukraine country
risk on pages 36 to 38). As a result, the Group is exposed to a number of risk
areas that are heightened compared to those expected in a developed economy,
such as an environment of political, fiscal and legal uncertainties. Although
the Group has operated successfully in difficult circumstances in recent
years, the war in Ukraine and other circumstances facing the Group has led to
an escalation of a number of risks, including risks relating to the political
environment and the independence of the legal system, which could have a
material negative impact on the Group's business and reputation. For more
information on critical judgements made by management in preparing these
consolidated financial statements, see also Note 15 Commitments, contingencies
and legal disputes. The critical judgements made are predominantly in respect
of the ongoing share dispute and the imposed currency control measures in
Ukraine under the Martial Law.
If the Group is unable to continue to realise assets and discharge liabilities
in the normal course of business, it would be necessary to adjust the amounts
in the statement of financial position in the future to reflect these
circumstances, which may materially change the measurement and classification
of certain figures contained in these consolidated financial statements.
Changes in accounting policies
New standards and interpretations adopted
The accounting policies and methods of computation adopted in the preparation
of the consolidated financial statements are consistent with those followed in
the preparation of the Group's annual financial statements for the year ended
31 December 2021 except for the adoption of new standards, interpretations and
amendments to UK adopted IFRS effective as of 1 January 2022.
All new standards, interpretations and amendments adopted as of 1 January 2022
did not have a material impact on the Group's consolidated financial
statements for the year ended 31 December 2022. Full disclosure of the list of
new standards, interpretations and amendments adopted during the year will be
provided in Note 3 New accounting policies included in the Group's 2022 Annual
Report and Accounts.
Furthermore, the Group does not expect an impact on its consolidated financial
statements from all other standards, interpretations and amendments issued at
the reporting date, but not yet to be adopted for these financial statements.
Use of critical estimates and judgements
The preparation of consolidated financial statements in conformity with IFRSs
requires management to make estimates and judgements that affect the amounts
reported in the consolidated financial statements and accompanying notes.
These estimates and judgements are based on information available as at the
date of authorising the consolidated financial statements for issue. Actual
results could therefore differ from those estimates and judgements. The Group
identified a number of areas involving the use of critical estimates and
judgements made by management in preparing the consolidated financial
statements and supporting information is embedded within the following
disclosure notes:
Critical estimates
- Note 10 Property, plant and equipment - impairment
consideration as a result of Russian invasion into Ukraine
- Note 11 Goodwill and other intangible assets - impairment
consideration as a result of Russian invasion into Ukraine
- Note 12 Inventories - net realisable value of stockpiled
low-grade and weathered ore
Critical judgements
- Note 2 Basis of preparation - going concern assumption
- Note 8 Taxation - tax legislation in Ukraine and development
in international tax environment
- Note 15 Commitments, contingencies and legal disputes -
assessment of matters in an environment of political, fiscal and legal
uncertainties
Note 3: Segment information
The Group is managed as a single segment, which produces, develops and markets
its principal product, iron ore pellets, for sale to the metallurgical
industry. While the revenue generated by the Group is monitored at a more
detailed level, there are no separate measures of profit reported to the
Group's Chief Operating Decision-Maker ("CODM"). In accordance with IFRS 8
Operating segments, the Group presents its results in a single segment, which
are disclosed in the consolidated income statement for the Group.
Management monitors the operating result of the Group based on a number of
measures, including underlying EBITDA, gross profit and net cash.
Underlying EBITDA and gross profit
The Group presents the underlying EBITDA as it is a useful measure for
evaluating its ability to generate cash and its operating performance.
The Group's full definition of underlying EBITDA is disclosed in the Glossary
on page 75.
US$000 Notes Year ended Year ended
31.12.22 31.12.21
Profit before tax and finance 405,673 1,082,478
Losses on disposal and liquidation of property, plant and equipment 1,665 4,695
Share-based payments 490 856
Write-offs and impairments 5 260,308 235,618
Depreciation and amortisation 96,977 115,112
Underlying EBITDA 765,113 1,438,759
US$000 Notes Year ended Year ended
31.12.22 31.12.21
Revenue 4 1,248,490 2,518,230
Cost of sales 5 (582,445) (727,818)
Gross profit 666,045 1,790,412
Net cash
Net cash as defined by the Group comprises cash and cash equivalents less
interest-bearing loans and borrowings.
US$000 Notes As at As at
31.12.22 31.12.21
Cash and cash equivalents 13 112,945 167,291
Interest-bearing loans and borrowings - current 14 (5,194) (48,206)
Interest-bearing loans and borrowings - non-current 14 (1,354) (2,143)
Net cash 106,397 116,942
Net cash is an Alternative Performance Measure ("APM"). Further information on
the APMs used by the Group, including the definitions, is provided on pages 75
and 76.
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external customers
attributable to the UK, the Company's country of domicile. The information on
the revenues from external customers attributed to the individual foreign
countries is given in Note 4 Revenue. The Group does not have any significant
non-current assets that are located in the country of domicile of the Company.
The vast majority of the non-current assets are located in Ukraine.
Note 4: Revenue
Revenue for the year ended 31 December 2022 consisted of the following:
US$000 Year ended Year ended
31.12.22 31.12.21
Revenue from sales of iron ore pellets and concentrate 1,144,079 2,323,238
Freight revenue related to sales of iron ore pellets and concentrate 43,557 137,595
Total revenue from sales of iron ore pellets and concentrate 1,187,636 2,460,833
Revenue from logistics and bunker business 54,491 50,393
Revenue from other sales and services provided 6,363 7,004
Total revenue 1,248,490 2,518,230
Since February 2022, the Group's seaborne sales through the port of Pivdennyi
have been suspended as Ukraine's Black Sea ports are closed due to the war
with Russia. Historically, the sales through the port of Pivdennyi have
represented approximately half of the Group's sales. As a result, the Group
has had to divert its iron ore pellet sales to the European market through the
available railway network and its barging operation on the Danube. The market
in Europe was however not able to absorb all the volumes that would have been
sold to other markets with ocean-going vessels.
Revenue for the year ended 31 December 2022 includes the effect from the
derecognition of contract liabilities of US$7,648 thousand (2021: US$8,487
thousand) deferred as revenue in the comparative year ended 31 December 2021.
As at 31 December 2022, freight-related revenue in the amount of US$75
thousand was deferred as the performance obligations was not fulfilled and
included in the balance of the contract liabilities.
Export sales of iron ore pellets and concentrate by geographical destination
showing separately countries that individually represented 10% or more of
export sales in either the current or prior year were as follows:
US$000 Year ended Year ended
31.12.22 31.12.21
Europe, including Turkey 944,859 1,354,048
Austria 460,492 527,200
Czech Republic 148,128 106,350
Slovakia 138,302 80,288
Turkey 86,640 270,514
Germany 38,195 291,235
Others 73,102 78,461
China & South East Asia 164,397 770,584
China 71,041 549,885
Others 93,356 220,699
North East Asia 47,496 223,409
Middle East & North Africa 29,982 23,928
North America 902 88,864
Total exports 1,187,636 2,460,833
The Group markets its products across various regions. The disclosure of the
segmentation reflects how the Group makes its business decisions and monitors
its sales. During the financial year 2022, the Group's sales of iron pellets
and concentrate were significantly impacted by the ongoing war in Ukraine. Due
to the ongoing war, the Group's seaborne sales through the port of Pivdennyi
have been suspended and sales had to be diverted to the market in Europe.
During the year ended 31 December 2022, sales made to five customers accounted
for 66% of the revenues from export sales of ore pellets and concentrate
(2021: 53%).
Sales to customers that individually represented more than 10% of total sales
in either current or prior year are as follows:
US$000 Year ended Year ended
31.12.21
31.12.22
Customer A 461,394 616,064
Customer B 148,128 106,350
Customer C 138,302 80,288
Customer D 38,195 290,511
Customer E 2,492 211,231
Note 5: Operating expenses
Operating expenses for the year ended 31 December 2022 consisted of the
following:
US$000 Year ended Year ended
31.12.21
31.12.22
Cost of sales 582,445 727,818
Selling and distribution expenses 236,085 340,301
General and administrative expenses 63,847 72,163
Other operating expenses 309,669 271,629
Total operating expenses 1,192,046 1,411,911
Total operating expenses include:
US$000 Year ended Year ended
31.12.22 31.12.21
Inventories recognised as an expense upon sale of goods 540,010 697,900
Employee costs (excl. logistics and bunker business) 92,144 104,018
Inventory movements (52,953) (51,603)
Depreciation of property, plant and equipment and right-of-use assets 95,127 113,429
Amortisation of intangible assets 1,851 1,682
Royalties 43,461 40,871
Costs of logistics and bunker business 55,916 47,254
Audit and non-audit services 2,055 1,694
Community support donations 14,536 6,449
Write-offs and impairments 260,308 235,618
Losses on disposal and liquidation of property, plant and equipment 1,665 4,695
US$000 Notes As at As at
31.12.22 31.12.21
Write-off of inventories 269 247
Write-off of property, plant and equipment 10 5,562 3,233
Write-off of intangible assets - 931
Write-off of receivables and prepayments - 96
Total write-offs 5,831 4,507
Impairment of property, plant and equipment 10 219,931 −
Impairment of goodwill and other intangible assets 29,103 −
Impairment of other non-current assets 5,443 −
Impairment of inventories 12 - 231,111
Total impairments 254,477 231,111
Total write-offs and impairments 260,308 235,618
Impairment of property, plant and equipment, goodwill and other intangible
assets as well as of other non-current assets are caused by the Russian
invasion into Ukraine in February 2022, which was considered as a
non-adjusting post balance sheet event as at 31 December 2021 and became an
adjusting event for the year ended 31 December 2022. See Note 10 Property,
plant and equipment and Note 11 Goodwill and other intangible assets for
further information.
Impairment of inventories for the comparative year ended 31 December 2021 is
related to the stockpiled low-grade ore for which the start of the processing
and the volume expected to be utilised could not be reliably estimated. As at
the date of the approval of the consolidated financial statements as at 31
December 2022, the start of the processing and the volume expected to be
utilised cannot be reliably estimated. Further information is provided in Note
12 Inventories.
Write-offs of property, plant and equipment and intangible assets for the
comparative year ended 31 December 2021 is primarily related to the
cancellation of the licence for the Galeschynske project, which is in the
exploration phase. Whilst the Group is focused on returning this licence to
its previous state, all capitalised costs associated with this licence have
been written off as the outcome is currently uncertain. For further
information see Note 15 Commitments, contingencies and legal disputes and the
update on the Group's Principal Risks on pages 36 to 38 in terms of the
Ukraine country risk.
Auditor remuneration
US$000 Year ended Year ended
31.12.21
31.12.22
Audit services
Ferrexpo plc Annual Report and Accounts 1,631 1,269
Subsidiary entities 185 196
Total audit services 1,816 1,465
Audit-related assurance services 255 229
Total audit and audit-related assurance services 2,071 1,694
Non-audit services
Other services 2 -
Total non-audit services 2 -
Total auditor remuneration 2,073 1,694
Auditor remuneration paid is in respect of the audit of the financial
statements of the Group and its subsidiary companies and, when applicable, for
the provision of other services not in connection with the audit. Audit
services for the year ended 31 December 2022 include
US$242 thousand relating to year-end audit for the financial year 2021
incurred as a result of the war in Ukraine.
Note 6: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December 2022
consisted of the following:
US$000 Year ended Year ended
31.12.22 31.12.21
Operating foreign exchange gains/(losses)
Conversion of trade receivables 340,189 (37,791)
Conversion of trade payables (623) 38
Other (127) (55)
Total operating foreign exchange gains/(losses) 339,439 (37,808)
Non-operating foreign exchange losses
Conversion of interest-bearing loans (77,678) (3,229)
Conversion of cash and cash equivalents 9,711 (181)
Other 4,470 210
Total non-operating foreign exchange losses (63,497) (3,200)
Total foreign exchange gains/(losses) 275,942 (41,008)
The translation differences and foreign exchange gains and losses are
predominantly dependent on the fluctuation of the exchange rate of the
Ukrainian hryvnia against the US dollar and the outstanding US dollar
denominated receivable balances in Ukraine. Following the Russian invasion
into Ukraine on 24 February 2022, the National Bank of Ukraine pegged the
Ukrainian hryvnia at 29.255 to the US dollar in order to mitigate the adverse
impact from the war on the local financial system. On 21 July 2022, the
National Bank of Ukraine devalued the local currency to 36.568 to the US
dollar with immediate effect. This devaluation of the local currency had a
positive effect on the Group's production costs and resulted in operating
foreign exchange gains on the conversion of the Ukrainian subsidiaries' trade
receivables denominated in US dollar. The depreciation of the Ukrainian
hryvnia of c. 34% also reduces the Group's net assets as assets and
liabilities of the Ukrainian subsidiaries are denominated in the local
currency. The exchange differences arising on translation of non-US dollar
functional currency operations (mainly in Ukrainian hryvnia) are included in
the translation reserve.
The table below shows the closing and average rates of the most relevant
currencies of the Group compared to the US dollar.
Average exchange rates Closing exchange rates
Against US$ As at As at Year ended Year ended
31.12.22 31.12.21 31.12.22 31.12.21
UAH 32.342 27.286 36.569 27.278
EUR 0.951 0.845 0.934 0.882
Note 7: Net finance expense
Finance expense and income for the year ended 31 December 2022 consisted of
the following:
US$000 Year ended Year ended
31.12.22 31.12.21
Finance expense
Interest expense on loans and borrowings (479) (9,567)
Less capitalised borrowing costs 479 5,343
Net interest on defined benefit plans (2,678) (3,211)
Bank charges (871) (632)
Interest expense on lease liabilities (233) (474)
Other finance costs (664) (399)
Total finance expense (4,446) (8,940)
Finance income
Interest income 888 609
Other finance income 41 28
Total finance income 929 637
Net finance expense (3,517) (8,303)
Note 8: Taxation
Critical judgements
Tax legislation
The Group operates across a number of jurisdictions through its value chain
and prices its sales between its subsidiaries using international benchmark
prices for comparable products covering product quality and applicable freight
costs. The Group judges these to be on terms which comply with applicable
legislation in the jurisdictions in which the Group operates.
On 27 June 2022, the Supreme Court of Ukraine ruled partially in favour of the
State Fiscal Service of Ukraine ("SFS") in respect of a claim made by the SFS,
despite two favourable verdicts received by the Group's subsidiary from lower
court instances. The claim was in respect of a tax audit performed for the
period from 1 September 2013 to 31 December 2015 at the Group's major
subsidiary in Ukraine with a focus on cross-border transactions. As a result
of this court decision, an amount of UAH234 million (US$7,999 thousand) became
a legally binding obligation and was paid in July 2022. The partially negative
verdict of the Supreme Court of Ukraine might have an adverse impact on the
tax audits described below as the STS might use the court verdict as a
precedent.
On 18 February 2020, the State Tax Service of Ukraine ("STS"), formerly known
as SFS, commenced two tax audits for cross-border transactions between the
Group's major subsidiary in Ukraine and two subsidiaries of the Group outside
of Ukraine in relation to the sale of iron ore products during the financial
years 2015 to 2017. The audits were halted in March 2020 due to a Covid-19
related quarantine imposed in Ukraine and resumed on 10 February 2021. On 14
June 2021, the STS commenced another tax audit for the financial years 2015 to
2017 for cross-border transactions of another Ukrainian subsidiary with the
same two subsidiaries of the Group outside of Ukraine. Both audits have been
suspended when Ukraine declared Martial law, but resumed again on 25 January
2023. Based on legislation in Ukraine, the results of these audits are to be
provided by the STS within 18 months after commencement. The period for both
audits has been interrupted first by the Covid-19 related quarantine imposed
between March 2020 and February 2021 and then on 24 February 2022 due to the
declaration of Martial law as a result of the Russian invasion into Ukraine.
The deadlines to provide the reports for the audits have not expired as of 31
December 2022 and are 10 June 2023 and 15 November 2023, respectively.
Despite the verdict received from the Supreme Court of Ukraine, the Group
still considers that it has complied with applicable legislation for all
cross-border transactions undertaken and is of the opinion that the court did
not appropriately consider relevant technical grounds and the applicable
legislation when ruling on this case. In the case of new claims, the Group
will continue to defend its methodology applied to determine the prices
between its subsidiaries, but is aware that there is a risk that the
independence of the judicial system and its immunity from economic and
political influences in Ukraine is not upheld. As of the approval of these
consolidated financial statements, no claims have been made by the STS in
respect of the audits commenced in 2020 and 2021. As a consequence, no
provision has been recorded as at 31 December 2022 for transactions and years
subject to the audits commenced by the STS as it is impossible to reasonably
quantify the potential exposure.
Separate from the cases mentioned above, on 23 June 2020 Ferrexpo Poltava
Mining ("FPM") received a court ruling, which grants access to information and
documents to the State Bureau of Investigators in Ukraine ("SBI") in relation
to the sale of iron ore products to two subsidiaries of the Group outside of
Ukraine during the years 2013 to 2019. The court ruling relates to pre-trial
investigations carried out by the SBI in relation to potential tax evasion by
the Group in Ukraine. At the time of the approval of these consolidated
financial statements, there is very little information provided in the court
ruling in respect to the alleged offences. There is no quantified claim made
by the SBI and the ruling is primarily seeking disclosure of information in
order to allow the SBI to determine whether there have potentially been any
offences. The Ukrainian subsidiaries cooperated with the SBI and provided the
requested information as per the court ruling in order to support these
pre-trial investigations. As of the date of approval of these consolidated
financial statements, there have been no actions or any new requests received
from the SBI.
As required by IFRIC 23 Uncertainty over income tax treatments, the Group
reviewed and reassessed its exposure in respect of all uncertain tax
positions, including the audits of cross-border transactions in Ukraine under
the provisions of this interpretation. The Ukrainian legislation and
regulations on taxation are not always clearly written and are therefore
subject to varying interpretations and inconsistent enforcement by local,
regional and national tax authorities. In case of any claims made by the STS
and considering the uncertainties of the legal and tax framework in Ukraine,
the Group will defend its pricing methodology applied during these years in
the courts in Ukraine. An unfavourable outcome of any future court proceedings
would have an adverse impact on the Group's total income tax expense and
effective tax rate in future periods. See also the Principal Risks section on
pages 36 to 38 for further information on the Ukraine country risk.
Except for the matters in Ukraine mentioned above, the Group is not aware of
any significant challenges by local tax authorities in any jurisdictions in
which the Group operates. However, the application of international and local
tax legislation and regulations can be complex and requires judgement to
assess possible associated risks, particularly in relation to the Group's
cross-border operations and transactions.
The income tax expense for the year ended 31 December 2022 consisted of the
following:
US$000 Year ended Year ended
31.12.22 31.12.21
Current income tax
Current income tax charge 100,064 202,335
Amounts related to previous years 6,389 (1,010)
Total current income tax 106,453 201,325
Deferred income tax
Origination and reversal of temporary differences 12,209 (1,343)
Total deferred income tax 12,209 (1,343)
Total income tax expense 118,662 199,982
Tax effects on items recognised in other comprehensive income consisted of the
following for the year ended 31 December 2022:
US$000 Year ended Year ended
31.12.22 31.12.21
Tax effect of exchange differences arising on translating foreign operations (13,036) 3,313
Total income tax effects recognised in other comprehensive (credit)/charge (13,036) 3,313
The weighted average statutory corporate income tax rate is calculated as the
average of the statutory tax rates applicable in the countries in which the
Group operates, weighted by the profits and losses before tax of the
subsidiaries in the respective countries, as included in the consolidated
financial information. The weighted average statutory corporate income tax
rate was 13.8% for the financial year 2022 (2021: 15.5%). A reconciliation
between the income tax charged in the accompanying financial information and
income before taxes multiplied by the weighted average statutory tax rate for
the year ended 31 December 2022 is as follows:
US$000 Year ended Year ended
31.12.21
31.12.22
Profit before tax 338,659 1,070,975
Notional tax charge computed at the weighted average statutory tax rate of 46,769 166,330
13.8% (2021: 15.5%)
Derecognition of deferred tax assets(1) 14,757 1,107
Expenses not deductible for local tax purposes(2) 4,615 721
Income exempted for local tax purposes(3) (158) (238)
Effect from utilisation of non-recognised deferred taxes(4) - (5,852)
Effect from capitalised tax loss carry forwards on historic tax losses(4) - (1,578)
Effect from non-recognition of deferred taxes(5) 34,882 41,442
Effect from non-recognition of deferred taxes on current year losses(6) 2,884 -
Effect of different tax rates on local profit streams(7) (3,412) (1,131)
Withholding tax on dividends(8) 11,540 -
Prior year adjustments to current tax(9) 6,389 (1,010)
Effect from share of profit from associates(10) (100) (803)
Other (including translation differences) 496 994
Total income tax expense 118,662 199,982
1. The majority of the derecognition in 2022 is an allowance of
US$10,749 thousand booked on deferred tax assets recognised by two of the
Group's subsidiaries in Ukraine as a result of uncertainties as some of the
temporary differences are not expected to unwind in the near future.
Considering the material uncertainty in terms of the Group's going concern,
the relevant period for the recovery of the recognised net balance of deferred
tax assets has been aligned to the period of the going concern assessment. The
remaining amount in 2022 is primarily related to deferred tax assets
recognised in 2019 in light of the change of the tax law in Switzerland and
the derecognition of deferred taxes initially recognised at one of the Group's
subsidiaries in Ukraine. As a result of the ongoing war in Ukraine, it is
currently not expected that this specific subsidiary will have taxable profits
in the near future. The amount derecognised in 2021 is related to deferred tax
assets recognised in Switzerland in light of the mentioned change of the tax
law. These deferred tax assets recognised were in connection with available
transitional measures for companies losing the special tax status available
under the old tax law. The derecognition is due to the fact that the taxable
profits of the Swiss subsidiaries were lower than forecasted. Whilst the
initial recognition is considered of a non-recurring nature, the derecognition
might recur depending on the taxable profits of the Swiss subsidiaries in the
future.
2. The effects in 2022 and 2021 predominantly relate to expenses not
deductible in Ukraine. This effect is expected to be of a recurring nature as
a portion of operating expenses in Ukraine is historically not deductible for
tax purposes according to the enacted local tax legislation.
3. The effects in 2022 and 2021 relate to income expected to be tax
exempted in the United Kingdom as primarily related to the adoption of IFRS 9.
This effect is considered to be of a recurring nature.
4. The effect relates to a subsidiary in Ukraine, for which no deferred
tax asset was recognised for available tax losses at the end of the
comparative year ended 31 December 2021. During the financial year 2021, the
subsidiary became profitable and available tax losses incurred in previous
years were used to offset the profit. As all available losses are either used
or recognised as a deferred tax asset as at 31 December 2021, this effect is
considered to be of a non-recurring nature.
5 The effect in 2022 predominantly relates to the impairment loss of
US$254,477 thousand on the Group's non-current operating assets as a result of
the war in Ukraine, net of the effect from the changed depreciation pattern
for the impaired assets. In 2021, the effect relates to the impairment loss of
US$231,111 thousand on stockpiled low-grade ore recorded in one of the Group's
subsidiaries in Ukraine. Both impairment losses are not tax deductible in
Ukraine. Whilst the effect in 2022 could be of a recurring nature, also
depending on the situation in Ukraine, the effect in 2021 is considered to be
of a non-recurring nature. In the case that the situation in Ukraine will
significantly improve, there is a chance that the recorded impairment losses
will recover in a future period. Such potential positive effects are expected
to be tax exempted. There are other expenses in Ukraine and the United
Kingdom, which are historically not deductible for tax purposes according to
the enacted local tax legislation and considered to be of a recurring nature.
6. The effect relates mainly to a subsidiary in Ukraine. Due to the
uncertainty in respect of the timing of the subsidiary becoming profitable for
local tax purposes, no deferred tax asset has been recognised. This effect was
considered to be of a recurring nature until this subsidiary becomes operative
and profitable.
7. The effects relate to the different tax rates applying to different
income streams in Swiss subsidiaries as a result of their specific tax status.
The effect is of a recurring nature.
8. The effect in 2022 relates to effects of dividends paid by one of the
subsidiaries in Ukraine, which are subject to withholding tax, whereas the
dividend income was not subject to income taxes under the participation
exemption regime in place in Switzerland. The effect in future years depends
on the level of dividend payments made.
9. The effect in 2022 primarily relates to a negative decision received
in respect of the transfer pricing claim for the financial year 2015, for
which a final decision was received from the relevant court instance in 2022.
The effect in 2021 relates to final tax assessments received in Switzerland.
Similar effects, irrespective of the jurisdiction, are likely to occur in the
future. In addition to the effect in Switzerland in 2021, included therein is
the release and recognition of provisions, which are expected to be
non-recurring.
10. Share of profit from associates is generally recognised net of taxes of
the associates. This effect is of a recurring nature.
The Group operates across a number of jurisdictions and its effective tax rate
is subject to various factors outside of the Group's control. This includes
the volatility in the global iron ore pellet market and foreign exchange rate
movements, primarily between the Ukrainian hryvnia and the US dollar. The
effective tax rate of the financial year 2022 was 35.0% as a result of the
recorded impairment loss totalling US$254,477 thousand on the Group's
non-current operating assets which is not tax deductible in Ukraine (see Note
10 Property, plant and equipment for further information) and due to the fact
that no deferred tax asset was recognised for the resulting temporary
differences. Further to that, the Group recorded an allowance of US$10,749
thousand on deferred tax assets recognised by two of the Group's subsidiaries
in Ukraine. Without these two effects, the effective tax rate would have been
18.2%.
The effective tax rate of 18.7% for the financial year 2021, was affected by
the impairment loss on the stockpiled low-grade ore, which was also not tax
deductible in Ukraine, compared to the weighted average statutory corporate
income tax rate of 15.5%.
The net balance of income tax payable changed as follows during the financial
year 2022:
US$000 Year ended Year ended
31.12.22 31.12.21
Opening balance (36,502) (57,132)
Charge in the consolidated income statement (106,453) (201,325)
Booked through other comprehensive (loss)/income 13,036 (3,313)
Tax paid 110,243 227,930
Translation differences 3,786 (2,662)
Closing balance (15,890) (36,502)
The net income tax payable as at 31 December 2022 consisted of the following:
US$000 As at As at
31.12.22 31.12.21
Income tax receivable balance 4,674 636
Income tax payable balance (20,564) (37,138)
Net income tax payable (15,890) (36,502)
Temporary differences at the reporting date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes
and the recognition of available tax loss carry forwards result in the
following deferred income tax assets and liabilities at
31 December 2022:
Consolidated statement Consolidated
of financial position
income statement
US$000 As at As at Year ended 31.12.22 Year ended 31.12.21
31.12.22 31.12.21
Property, plant and equipment 13,474 23,757 (4,106) 895
Right-of-use assets 526 532 129 92
Intangible assets 3,956 5,942 (1,944) (1,456)
Inventories 205 478 (152) 123
Allowance for restricted cash and deposits - 3,837 (2,862) -
Defined benefit pension liability 459 537 (77) (560)
Other 1,325 1,679 177 450
Tax losses recognised 255 2,157 (1,901) 1,657
Total deferred tax assets/change 20,200 38,919 (10,736) 1,201
Thereof netted against deferred tax liabilities (5,729) (5,973)
Total deferred tax assets as per the statement of financial position 14,471 32,946
Property, plant and equipment (320) (559) 239 33
Intangible assets (384) (470) (33) (472)
Financial assets (4,076) (4,133) 56 289
Inventories (1,334) - (1,334) -
Lease obligations (503) (590) (305) (53)
Other (459) (362) (96) 345
Total deferred tax liabilities/change (7,076) (6,114) (1,473) 142
Thereof netted against deferred tax assets 5,729 5,973
Total deferred tax liabilities as per the statement of financial position (1,347) (141)
Net deferred tax assets/net change 13,124 32,805 (12,209) 1,343
The movement in the deferred income tax balance is as follows:
US$000 Year ended Year ended
31.12.21
31.12.22
Opening balance 32,805 30,473
Charge in consolidated income statement (12,209) 1,343
Translation differences (7,472) 989
Closing balance 13,124 32,805
The net deferred tax asset balance of US$13,124 thousand includes deferred tax
assets totalling US$14,448 thousand related to temporary differences of the
Group's two major subsidiaries in Ukraine, with the remaining balance
reflecting deferred tax liabilities of subsidiaries outside of Ukraine. The
recoverability of these deferred tax assets depends on the level of taxable
profits realised by the two subsidiaries in future periods and the duration of
the unwind of the temporary differences. Considering the material uncertainty
in terms of the Group's going concern, the relevant period for the recovery of
the recognised net balance of deferred tax assets has been aligned to the
period of the going concern assessment. Despite the fact that the two
Ukrainian subsidiaries realised taxable profits for the financial year 2022
and taxable profits are also expected for the period covered by the going
concern assessment, an allowance of US$10,749 thousand was booked as at 31
December 2022 as a result of uncertainties in terms of the timing of the
unwind of some of the temporary differences. The level of taxable profits in
Ukraine depends on many factors, such as the level of supply of power, the
volatility in the global iron pellet market and foreign exchange rate changes,
but also on the implications of the ongoing war in Ukraine as a whole.
As at 31 December 2022, the Group had available tax loss carry forwards in the
amount of US$68,691 thousand (2021: US$78,188 thousand) for which no deferred
tax assets were recognised. US$41,687 thousand (2021: US$44,591 thousand) are
related to losses incurred in Ukraine and Austria and those losses do not
expire. The remaining balance totalling US$27,004 thousand (2021: US$33,598
thousand) relates to losses incurred in Hungary, of which US$13,736 thousand
(2021: US$19,545 thousand) expire after more than eight years.
No deferred tax liabilities have been recognised on temporary differences in
the amount of US$663,536 thousand (2021: US$1,282,355 thousand) arising from
undistributed profits from subsidiaries as no distributions are planned. Other
temporary differences of US$270,939 thousand have not been recognised as of 31
December 2022 (2021: US$7,765 thousand), of which the vast majority relates to
temporary differences on property, plant and equipment in Ukraine. The
increase compared to the comparative period is primarily due to non-recognised
deferred tax assets on the impairment loss of US$254,477 thousand during the
financial year 2022.
Future developments
Following an agreement reached by the Finance Ministers from the G7 in July
2021 backing the creation of a global minimum corporate tax rate of at least
15%, over 140 countries and jurisdictions have agreed to the OECD/G20
Inclusive Framework on BEPS, also referred to as BEPS 2.0, including Ukraine,
United Arab Emirates and Switzerland. The new framework aims to ensure that
large multinational enterprises pay a fair share of tax wherever they operate
and to set a global minimum tax rate. Earliest possible implementation is in
2024 and it is expected that implementation in key countries will commence
soon. Whilst some details are still unknown, the United Arab Emirates and
Switzerland announced the adjustment of their local tax legislation by 1 June
2023 and 1 January 2024 respectively, resulting in an increase of the local
corporate tax rate.
Based on the current understanding of the anticipated changes to the global
tax landscape, the Group expects an increase of its future effective tax rate
once adjustments are made to relevant local tax legislation. The Group's
future effective tax rate is expected to be in a range of 15.0% to 19.0%. As
mentioned above, this effective tax rate is also dependent on the volatility
in the global iron ore pellet market and on foreign exchange rate movements,
primarily between the Ukrainian hryvnia and the US dollar, and any one-off
events, such as impairment losses that might not be tax deductible in some
jurisdictions.
Note 9: Earnings per share and dividends paid and proposed
Distributable reserves
Ferrexpo plc (the "Company") is the Group's holding company, with no direct
operating business, so its ability to make distributions to its shareholders
is dependent on its ability to access profits held in the subsidiaries. The
Group's consolidated retained earnings shown in the consolidated statement of
changes in equity do not reflect the profits available for distribution in the
Group as of 31 December 2022.
Year ended Year ended
31.12.21
31.12.22
Earnings for the year attributable to equity shareholders - per share in US
cents
Basic 37.41 148.2
Diluted 37.35 147.9
Profit for the year attributable to equity shareholders - US$000
Basic and diluted earnings 219,997 870,993
Weighted average number of shares - thousands
Basic number of Ordinary Shares outstanding 588,017 587,699
Effect of dilutive potential Ordinary Shares 931 1,028
Diluted number of Ordinary Shares outstanding 588,948 588,727
Dividends proposed and paid
Considering the continued unpredictable situation in Ukraine, no further
dividends are proposed for the financial year 2022 as at the date of the
approval of these consolidated financial statements. Taking into account the
provisions of the Companies Act 2006 and relevant thin capitalisation rules,
the total available distributable reserves of Ferrexpo plc is US$118,624
thousand as of 31 December 2022 (2021: US$170,800 thousand). Future
distributable reserves at the Ferrexpo plc level are also dependent on the
payment of dividends by the subsidiaries to the respective parent companies
within the Group and certain Group companies are currently restricted from
paying dividends outside of Ukraine as a result of Ukrainian currency control
measures imposed under the Martial Law. The recorded impairment loss as of 31
December 2022 and the war-related uncertainties, as well as the uncertainties
related to the political environment and the independence of the legal system
and other circumstances facing the Group (see Note 15 Commitments,
contingencies and legal disputes) could have a negative impact on the
potential for future dividend payments.
US$000 Year ended
31.12.22
Dividends paid during the year
Final dividend for 2021: 6.6 US cents per Ordinary Share 38,679
Interim dividend for 2022: 13.2 US cents per Ordinary Share 76,899
Interim dividend for 2021: 6.6 US cents per Ordinary Share 39,517
Total dividends paid during the year 155,095
Although accounts are published in US dollars and dividends are declared in US
dollars, the shares are denominated in UK pounds sterling and dividends are
therefore paid in UK pounds sterling.
Companies Act requirements in respect of dividend payments
During the financial year 2021, the Directors became aware of a technical
issue in respect of the interim dividend declared on 4 August 2021 and,
following investigations of the issue, of technical issues in respect of
dividend payments made by the Company in 2010 and 2011. The technical issues
were ratified by a shareholders' resolution passed at the general meeting of
the shareholders of Ferrexpo Plc on 15 June 2022.
US$000 Year ended
31.12.21
Dividends proposed
Interim dividend for 2021: 6.6 US cents per Ordinary Share 38,788
Total dividends proposed 38,788
The interim dividend for 2021 was declared on 22 December 2021 and paid on 28
January 2022.
US$000 Year ended
31.12.21
Dividends paid during the year
Interim dividend for 2021: 39.6 US cents per Ordinary Share 231,011
Final dividend for 2020: 13.2 US cents per Ordinary Share 77,890
Special interim dividend for 2020: 39.6 US cents per Ordinary Share 233,097
Special interim dividend for 2020: 13.2 US cents per Ordinary Share 77,379
Total dividends paid during the year 619,377
Note 10: Property, plant and equipment
During the year ended 31 December 2022, the additions to property, plant and
equipment totalled US$200,329 thousand (31 December 2021: US$316,898 thousand)
and the net book value of the disposals of property, plant and equipment
totalled US$22,799 thousand (31 December 2021: US$7,765 thousand). The total
depreciation charge for the year was US$94,162 thousand (31 December 2021:
US$120,751 thousand).
The carrying value of property, plant and equipment includes capitalised
borrowing costs on qualifying assets totalling US$35,694 thousand (31 December
2021: US$55,768 thousand).
Critical estimates
As at the date of the approval of these consolidated financial statements, the
war in Ukraine that commenced with the Russian invasion into Ukraine on 24
February 2022 is still ongoing. Even though the Group managed to operate
throughout the financial year 2022, the ongoing war had an adverse impact on
the Group's cash flow generation and it is expected that that this will
continue to be the case until the war comes to an end. During the financial
year 2022, the Group's cash flow generation was heavily affected by the fact
that the Group's seaborne sales through the port of Pivdennyi have been
suspended as a result of closed Black Sea ports in Ukraine since the beginning
of the war and the level of supply of power following severe Russian missile
strikes on state-owned electrical infrastructure.
The beginning of the war on 24 February 2022 was treated as a non-adjusting
post balance sheet event in the consolidated financial statements for the year
ended 31 December 2021, but became an adjusting event in the consolidated
financial statements for the period ended 30 June 2022.
The Group's impairment test is based on cash flow projections over the
remaining estimated lives of the GPL and the Yerystivske deposits, which are
expected to expire in 2058 and 2048, respectively, according to the current
approved mine plans. The cash flow projection is based on a financial
long-term model approved by senior management and the estimated production
volumes do not take into account the effects of expected future mine life
extension programmes. A number of significant judgements and estimates are
used when preparing the financial long-term model of the Group, which are,
together with the key assumptions used, reviewed by the Audit Committee with a
specific consideration given to the realistically plausible production volumes
in light of the disrupted supply of power and the logistics network available
to the Group, sales price and production cost forecasts as well as the used
discount rate.
Based on the base case of the Group's updated long-term model prepared for
2022 interim accounts, the value in use of the Group's single cash generating
unit's operating non-current assets, including property, plant and equipment,
goodwill and other intangibles as well as other non-current assets, was
US$254,477 thousand below the total carrying value of these assets, reflecting
an impairment loss in this amount. US$219,931 thousand of the total impairment
loss was allocated to various asset categories within property, plant and
equipment, US$27,340 thousand to goodwill, which was then fully impaired as of
30 June 2022 and US$1,763 thousand to various asset categories within
intangible assets. The remaining US$5,443 thousand reduced the carrying amount
of assets included within other non-current assets.
The impairment test as of 31 December 2022 was prepared based on a long-term
model updated in February 2023. Based on the cash flow generation forecasted
in the new model and a nominal pre-tax discount rate of 23.4%, compared to
20.4% as at 30 June 2022 and a pre-war WACC of 13.8% as of 31 December 2021,
no further impairment has to be recorded as of 31 December 2022. The carrying
value as of 31 December 2022 reflects the impairment of US$254,477 thousand
recorded as of 30 June 2022 and the devaluation of the Ukrainian hryvnia from
29.255 to 36.569 compared to the US dollar in July 2022, which reduced the
carrying value by US$201,375 thousand.
An average iron ore price of US$105 per tonne of 65% Fe fines CFR North China
was used in the assumptions for the cash flow projection for the next five
years. In determining the future long-term selling price, the Group takes into
account external and internal analysis of the longer-term and shorter-term
supply and demand dynamics throughout the world and considers local supply and
demand balances affecting its major customers and the effects this could have
on the longer-term price. In light of the ongoing disruption of the supply of
power due to the war, the production capacity used for the cash flow
projections is expected to be 50% and 75% of the pre-war level for the
financial years 2023 and 2024, before recovering in 2025 to the pre-war level.
As mentioned above, the Group's operation in 2022 was also affected by the
absence of a significant portion of seaborne sales due to the closed Black Sea
ports in Ukraine. It is expected that currently available logistic networks
will be sufficient to transport the lower level of produced pellets to the
Group's international customers, predominantly in Europe for the time being,
but also to customers in Asia. The increase of the available production
capacity assumed in the past for the years covered by the long-term model has
been adversely affected by the Russian invasion into Ukraine as the work on
certain growth projects had to be halted or slowed down. There is no perpetual
growth rate applied for the cash flow projections beyond the last year covered
by the Group's long-term model. Cost of production and shipping is considered
taking into account local inflationary pressures, major exchange rate
developments between the Ukrainian hryvnia and the US dollar, the longer-term
and shorter-term trends in energy supply and demand and the effect on costs
along with the expected movements in steel-related commodity prices, which
affect the cost of certain production inputs. An average devaluation of the
hryvnia of 9.7% per year was assumed over the next 5 years in the Group's cash
flow projection. For the purpose of the impairment test, the future cash flows
were discounted using a nominal pre-tax discount rate of 23.4% (2021: 13.8%)
per annum, reflecting the current situation in the country as underlying
macro-economic data used for the computation of the WACC was also adversely
affected by the war in Ukraine resulting in a significant increase of
Ukraine's country risk premium. The key assumptions in respect of production
and sales volumes, and of production costs, are largely dependent on the
easing of conflict risks facing the Group business, and therefore a wide range
of alternative outcomes are possible, reflecting a high level of uncertainty.
The key assumptions used for the preparation of the Group's long-term model
are:
Key assumptions Basis
Future production Proved and probable reserves and power
expected to be available
Commodity prices Contract prices and longer-term price estimates
Capital expenditures Future sustaining capital expenditures
Cost of raw materials and other production/distribution costs Expected future cost of production
Exchange rates Longer-term predictions of market exchange rates
Nominal pre-tax discount rate Cost of capital risk adjusted for the resource
concerned
The recorded impairment during the financial year 2022 will be re-assessed at
the end of any future reporting periods. If there are positive developments in
the Group's future cash flow generation and the relevant macro-economic data,
a portion of the impairment loss might reverse in future periods. Conversely,
an adverse change in the above key assumptions would further reduce the value
in use of the Group's operating non-current assets.
A delay of the recovery of the production and sales volumes to a pre-war level
by another year, with all other assumptions remaining unchanged, would reduce
the value in use of the Group's non-current operating assets by approximately
another US$149,000 thousand. A reduction of the realised price by US$5 per
tonne for the entire period covered by the long-term model would increase the
impairment loss by approximately US$224,000 thousand and a decrease of the
production and sales volume by 10%, combined with an increase of the
production costs by 5%, again for the entire period, would increase the
impairment loss by approximately US$308,000 thousand. An increase of the
pre-tax real discount rate by 3.0% would result in an increase of US$164,000
thousand, with all other assumptions remaining unchanged.
Note 11: Goodwill and other intangible assets
During the year ended 31 December 2022, the additions to the intangible assets
totalled US$548 thousand (31 December 2021: US$3,985 thousand). The total
amortisation charge for the period was US$1,851 thousand (31 December 2021:
US$1,681 thousand).
Critical estimates
The Russian invasion into Ukraine and the ongoing war resulted in an
impairment loss of US$254,477 thousand on the Group's operating non-current
assets, of which US$27,340 thousand were allocated to goodwill, which was then
fully impaired as of 30 June 2022, and US$1,763 thousand to various asset
categories within intangible assets. See Note 10 Property, plant and equipment
for further information on the impairment test performed as at 31 December
2022.
Note 12: Inventories
Critical estimates
Low-grade and weathered ore
Historically, inventories classified as non-current comprised low-grade and
weathered ore that were, based on the Group's processing plans, not planned to
be processed within the next 12 months. As at the date of the approval of the
consolidated financial statements as at 31 December 2022, it cannot be
reliably predicted when additional processing capabilities will be available
to specifically process the stockpiled low-grade ore, which was fully impaired
as at the end of the comparative year ended 31 December 2021.
The stockpiled low-grade ore is still considered as an asset for the Group and
some or all of the impairment loss of US$231,111 thousand might reverse in the
future, once changed facts and circumstances can be considered in the net
realisable value test of this asset. As at 31 December 2022, there are no
changes in facts and circumstances to be considered. The ongoing war in
Ukraine makes it currently difficult to accelerate the commenced engineering
studies for the exploration of possible options for new processing
capabilities for the specific purpose of processing low-grade ore.
The remaining balance of non-current inventories as at 31 December 2022
relates to weathered ore, which is expected to be processed after more than 12
months.
At 31 December 2022, inventories comprised:
US$000 As at As at
31.12.22 31.12.21
Raw materials and consumables 51,437 57,575
Spare parts 91,334 80,886
Finished ore pellets 52,625 48,058
Work in progress 25,832 13,496
Other 3,226 2,384
Total inventories - current 224,454 202,399
Weathered ore 6,277 8,414
Total inventories - non-current 6,277 8,414
Total inventories 230,731 210,813
Inventories classified as non-current comprise low-grade and weathered ore
that are, based on the Group's current processing plans, not planned to be
processed within the next 12 months. The processing of this stockpile will
take more than 12 months and the beginning and duration of the processing
depend on the Group's future mining activities, processing capabilities and
anticipated market conditions.
Following the impairment loss recorded at the end of the financial year 2021,
the volume of low-grade ore extracted during the year ended 31 December 2022
in the amount of US$9,690 thousand was fully recognised in the consolidated
income statement and included in the cost of sales.
Note 13: Cash and cash equivalents
As at 31 December 2022, cash and cash equivalents comprised:
US$000 As at As at
31.12.22 31.12.21
Cash at bank and on hand 112,945 158,052
Cash equivalents - 9,239
Total cash and cash equivalents 112,945 167,291
The debt repayments net of proceeds during the period ended 31 December 2022
totalled US$48,249 thousand (31 December 2021: US$221,188 thousand) affecting
the balance of cash and cash equivalents.
Further information on the Group's gross debt is provided in Note 14
Interest-bearing loans and borrowings.
The balance of cash and cash equivalents held in Ukraine amounts to US$45,229
thousand as at 31 December 2022 (31 December 2021: US$52,326 thousand).
Despite the foreign exchange control measures imposed under Martial Law in
Ukraine (see Note 15 Commitments, contingencies and litigation), this balance
is fully available to the Group for its operations in Ukraine and is therefore
not considered restricted.
Cash equivalents as at the end of the comparative year ended 31 December 2021
relate to cash deposits for letters of credit available within three months
from the date of inception of the letters of credit while cash deposits
available only after three months from the date of inception totalling
US$18,962 thousand were classified as other current assets.
Note 14: Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group's
major finance facilities.
US$000 As at As at
31.12.22 31.12.21
Current
Lease liabilities 5,194 6,060
Trade finance facilities - 42,146
Total current interest-bearing loans and borrowings 5,194 48,206
Non-current
Lease liabilities 1,354 2,143
Total non-current interest-bearing loans and borrowings 1,354 2,143
Total interest-bearing loans and borrowings 6,548 50,349
The Group has no uncommitted trade finance facilities available as at 31
December 2022, primarily due to the situation in Ukraine, compared to
US$140,000 as at the end of the comparative year ended 31 December 2021, of
which US$42,146 were drawn.
Trade finance facilities were secured against receivable balances related to
these specific trades.
The table below shows the movements in the interest-bearing loans and
borrowings:
US$000 Year ended Year ended
31.12.22 31.12.21
Opening balance of interest-bearing loans and borrowings 50,349 266,478
Cash movements:
Repayments of syndicated bank loans - secured - (256,666)
Repayments of other bank loans - unsecured - (764)
Principal and interest elements of lease payments (6,103) (5,904)
Change of trade finance facilities, net (42,146) 42,146
Total cash movements (48,249) (221,188)
Non-cash movements:
Amortisation of prepaid arrangement fees - 4
Additions to lease liabilities 5,340 4,506
Others (incl. translation differences) (892) 549
Total non-cash movements 4,448 5,059
Closing balance of interest-bearing loans and borrowings 6,548 50,349
The outstanding amount of the Group's syndicated revolving pre-export facility
was fully repaid at the end of the comparative year ended 31 December 2021 and
the facility was subsequently cancelled.
The interest elements of lease payments are included in the cash flows from
operating activities and not in the cash flows used in financing activities.
Note 15: Commitments, contingencies and legal disputes
Commitments
Commitments as at 31 December 2022 consisted of the following:
US$000 Year ended Year ended
31.12.21
31.12.22
Total commitments for the lease of mining land (out of the scope of IFRS 16) 50,963 57,665
Total capital commitments on purchase of property, plant and equipment 134,842 191,412
Commitments for investment in a joint venture 6,064 6,064
Contingencies
As disclosed in the 2021 Annual Report & Accounts, the Board, acting
through the Committee of Independent Directors (the "CID"), conducted during
the financial year 2020 a review in connection with the Group's sponsorship
arrangements with FC Vorskla and concluded its enquiry in March 2021. In
accordance with arrangements put in place for the full repayment of a loan
granted by FC Vorskla Cyprus Ltd. to a related party entity of the Group's
controlling shareholder outside of the Group, the Group understands that the
loan was repaid in full in August 2022.
Legal
In the ordinary course of business, the Group is subject to various legal
actions and ongoing court proceedings. There is a risk that the independence
of the judicial system and its immunity from economic and political influences
in Ukraine is not upheld, consequently Ukrainian legislation might be
inconsistently applied to resolve the same or similar disputes. See also the
Principal Risks section on pages 36 to 38 for further information on the
Ukraine country risk and Note 35 Events after the reporting period in terms of
another court order received.
Critical judgements
The Group is exposed to the risks associated with operating in a developing
economy, which may or may not be exacerbated by the war and/or the current
circumstances facing the Group's controlling shareholder (see Ukraine country
risk on pages 36 to 38). As a result, the Group is exposed to a number of risk
areas that are heightened compared to those expected in a developed economy,
such as an environment of political, fiscal and legal uncertainties, which
require a significant portion of critical judgements to be made by the
management.
Share dispute
On 23 November 2020, the Kyiv Commercial Court opened court proceedings in
relation to an old shareholder litigation. In 2005, a former shareholder in
PJSC Ferrexpo Poltava Mining ("FPM") brought proceedings in the Ukrainian
courts seeking to invalidate the share sale and purchase agreement pursuant to
which a 40.19% stake in FPM was sold to nominee companies that were previously
ultimately controlled by Kostyantin Zhevago, amongst other parties. After a
long period of litigations, all old claims were fully dismissed in 2015 by the
Higher Commercial Court of Ukraine. In January 2021, Ferrexpo AG ("FAG")
received a claim from a former shareholder in FPM to invalidate the share sale
and purchase agreement concluded in 2002.
In February 2021, FAG became aware that three new claims had been filed by
three other former shareholders in FPM. Taken together, four claimants seek to
invalidate the share sale and purchase agreement concluded in 2002 pursuant to
which a 40.19% stake in FPM was sold, similar to the previous claims made back
in 2005. The Kyiv Commercial Court ruled on 27 May 2021 in favour of FAG and
the opposing parties filed their appeals in June 2021. The Northern Commercial
Court of Appeal has opened the appeal proceedings and after several hearings
the Group received in September 2022 a judgement from the appeal court in
respect of the aforementioned claim, which states that the share purchase
agreement concluded in 2002 is invalid and orders that 40.19% stake of the
current share capital in FPM should be transferred to the claimants. The
shares in FPM claimed by the claimants, which in 2002 amounted to 40.19% of
FPM, now represents 8.5% of FPM's share capital as at 31 December 2022, taking
into account the dilutive effect from the numerous share capital increases
made by FAG since 2002.
Following the identification of numerous errors in the application of the
Ukrainian law in the judgement of the Northern Commercial Court of Appeal by
the Group's legal advisors, FAG filed a cassation appeal and requested the
Supreme Court of Ukraine to review the ruling made by the Northern Commercial
Court of Appeal. The hearing at the Supreme Court of Ukraine took place on 17
November 2022. After this first hearing and before the Supreme Court of
Ukraine concluded on the legal merits of the parties involved in this dispute,
the parties filed a motion requesting the case to be heard by the Grand
Chamber of the Supreme Court. During the court hearing held on 1 December
2022, the Supreme Court decided to refer the case for consideration to the
Grand Chamber of the Supreme Court. The first hearing by the Grand Chamber of
the Supreme Court is scheduled for 15 March 2023.
Based on legal advice obtained, management remain of the view that FAG has
compelling arguments to defend its position in the Grand Chamber of the
Supreme Court. However, there is a risk that the independence of the judicial
system and its immunity from economic and political influences in Ukraine is
not upheld. A negative decision from the Grand Chamber of the Supreme Court of
Ukraine would result in the loss of a significant proportion of the Group's
main operating subsidiary in Ukraine and have a material adverse impact on the
shareholders' equity attributable to the shareholders of Ferrexpo plc. Due to
legal uncertainties, including the percentage of FPM's share capital at the
year-end subject to the claims, it is currently impracticable to reasonably
estimate the financial impact, but it could be material. A negative decision
could also have an impact on potential future dividends from FPM to FAG and,
as result, on the distributable reserves of Ferrexpo plc (see Note 9 Earnings
per share and dividends paid and proposed for further details). No
non-controlling interest has been recognised as of 31 December 2022 because
the transfer of shares in FPM has not legally happened and FPM remains, as a
consequence, wholly owned by FAG as at the date of the approval of these
consolidated financial statements. It is management's view that such a
decision will not cast significant doubt on the Group's ability to continue as
a going concern. However, such a decision might complicate the daily business
of the Group's major subsidiary in Ukraine, as the intentions of the opposing
parties are not clear at this point of time.
Currency control measures imposed in Ukraine
With the start of the Russian invasion into Ukraine on 24 February 2022, the
Ukrainian government introduced Martial Law affecting, among others, aspects
relating to lending agreements, foreign exchange and currency controls and
banking activities.
As a result of the introduced Martial Law, the National Bank of Ukraine
("NBU") has introduced significant currency and capital control restrictions
in Ukraine. These measures are also affecting the Group in terms of its
cross-border payments to be made, which are restricted and may be carried out
only in exceptional cases. The maximum period for settlements of invoices
under export and import contracts was decreased as of 1 April 2022 from
previously 360 days to 180 days.
These measures put additional pressure on the Group's liquidity management as
the Ukrainian subsidiaries are currently not in the position to make cash
transfers outside of Ukraine. As it is essential to the Group that sufficient
liquidity is held outside of Ukraine in order to ensure that the Group's
liabilities can be settled when falling due, intercompany receivable balances
due to the Ukrainian subsidiaries have historically been paid when falling due
and after considering the local cash requirements for the operating activities
and the capital expenditure programmes. The currently lower operating
activities and the reduced capital expenditure programmes due to the ongoing
war has reduced the local cash requirements and consequently increased the
imbalance between payments to be made into Ukraine and local cash
requirements. As a result of the imposed currency control measures, the Group
has to carefully manage the payments to be made into Ukraine, as the local
subsidiaries cannot transfer any surplus funds back to the Group entities
outside of Ukraine, if required.
Failure to comply with the currency control regulations can result in
financial fines. The offence against the currency control regulations would
result in fines of 0.3% per day computed on the cumulative overdue receivable
balances. The Group has implemented various measures to mitigate the impact of
the currency control regulations and reduce the risk of material fines, but
there exists legal uncertainty in the application of the currency control
regulations during the Martial Law in Ukraine. The currency control
regulations may also be subject to change in the future (including with
retrospective effect). Therefore, there is a risk that the Group may become
subject to challenges from regulatory authorities in connection with the
application of the regulations. Considering the amount of outstanding
receivable balances between Group companies, there is a risk of material fines
becoming payable in the future. However, as a result of different
interpretations of the currency control regulations during the Martial Law and
the measures initiated by the Group to mitigate the risk of potential fines,
it is currently not possible to reliably estimate the amount of a potential
exposure.
Other ongoing legal proceedings and disputes
Royalty-related investigation and claim
On 3 February 2022, PJSC Ferrexpo Poltava Mining ("FPM") and Ferrexpo
Yeristovo Mining LLC ("FYM") received letters from the Office of Prosecutor
General notifying them about ongoing investigation on potential underpayment
of iron ore royalty payments during the years 2018 to 2021. The amount of
underpayment was not specified in the letters. As part of the investigation,
the Office of Prosecutor General requested documents related to iron ore
royalty payments and requested four representatives of the Group's
subsidiaries to appear as witnesses for investigations.
On 8 February 2022, FPM received a tax audit report, which claims the
underpayment of iron ore royalty payments during the period from April 2017 to
June 2021 in the amount of approximately UAH1,042 million (approximately
US$28,424 thousand as at 31 December 2022). The Group provided its objections
to the claims made in the tax audit report and it was expected that this case
will ultimately be heard by the courts in Ukraine. However, due to the current
situation in Ukraine, it is unknown if and when the tax office will provide
the final tax audit report considering or refusing FPM's objections as well as
if and when a first hearing will take place in respect of a final claim
received and how the aforementioned investigation is going to further develop.
On 16 November 2022, the detectives from the Bureau of Economic Security of
Ukraine conducted searches at FYM and FPM in connection with the
royalty-related investigation. On 3 February 2023, a notice of suspicion was
delivered to a senior manager of FPM, which claimed underpayment of royalty
payments in the amount of approximately UAH2,000 million (approximately
US$54,557 thousand as at 31 December 2022) and a bail UAH20 million (US$546
thousand as at 31 December 2022) was approved by the court on 9 February 2023.
An appeal was subsequently filed by FPM on the amount of the bail. On 6
February 2023, the court arrested the bank accounts of FPM. Following a motion
to change the scope of the arrest filed by FPM, the court on 8 February 2023
and on 16 February 2023 added exceptions to the original court order to arrest
the bank account of FPM in order to allow FPM to make payments for salaries,
local taxes, social security charges, payments for utilities as well as
payments to state and municipal companies. Other motions to change the scope
of the arrest and an appeal to cancel the arrest are expected to be considered
by the courts in March 2023.
Based on legal advice obtained, it is management's view that each of FPM and
FYM have compelling arguments to defend their positions in the court and, as a
consequence, no associated liabilities have been recognised in relation to the
claim in the consolidated statement of financial position as at 31 December
2022. However, as with other ongoing legal proceedings, there is a risk that
the independence of the judicial system and its immunity from economic and
political influences in Ukraine is not upheld and in that case there could be
a material adverse impact on the Group.
Contested sureties claim
On 7 December 2022, FPM received a claim in the amount of UAH4,727 million
(US$128,945 thousand) in respect of contested sureties. These contested
sureties relate to Bank F&C, a Ukrainian bank owned by the Group's
controlling shareholder and which the Group previously used as its main
transactional bank in Ukraine. Bank F&C is still going through the
liquidation process after having been declared insolvent by the National Bank
of Ukraine and put under temporary administration on 18 September 2015.
Following the loss of funds held at Bank F&C of approximately US$177,000
thousand, the Group, through its major subsidiaries in Ukraine, initiated
various court proceedings with the aim to maximise the Group's recovery in the
liquidation process of Bank F&C.
The counterparty in this claim alleges that it acquired rights under certain
loan agreements originally concluded between the Bank F&C and various
borrowers, some of which are associated entities of the Group's controlling
shareholder, by entering into the assignment agreement with the State
Guarantee Fund on 6 November 2020. The counterparty further claims that
Ferrexpo Poltava Mining ("FPM") provided sureties to Bank F&C to ensure
the performance of obligations under these loan agreements. It is FPM's
position that no such sureties have been signed. Based on a favourable court
decision in respect of the afore-mentioned court proceedings to maximise its
recovery, it is management's view that FPM has compelling arguments to defend
its position in the court and, as a consequence, no associated liabilities
have been recognised in relation to this claim in the consolidated statement
of financial position as at 31 December 2022. The date of the court hearing is
currently unknown.
Ecological claims
In September 2021, the State Ecological Inspection carried out an inspection
of Ferrexpo Yeristovo Mining LLC ("FYM") and on 1 October 2021 issued an order
to remove a number of alleged violations of environmental rules. On 19 October
2021, FYM received two ecological claims from the State Ecological Inspection.
One of the claims was related to an allegation of violation of rules regarding
removal of soil on a particular land plot and the State Ecological Inspection
requested payment for damages of approximately UAH768 million (US$21,000
thousand as at 31 December 2022). The other claim was related to an allegation
of absence of documents for disposal of waste on a particular land plot and
the State Ecological Inspection requested payment for damages in the amount of
approximately UAH18 million (US$492 thousand as at 31 December 2022). Each
claim states that if FYM does not voluntarily pay the damages, the State
Ecological Inspection will start court proceedings. In November 2021, FYM sent
written objections to these claims to the State Ecological Inspection. The
State Ecological Inspection has neither responded to FYM's objections nor
filed the claims to the court within a reasonable period by February 2022. In
February 2022, FYM has therefore filed a lawsuit to the court to challenge the
claims of the State Ecological Inspection. The Kremenchuk District
Prosecutor's Office is conducting the investigation in connection with alleged
violations of environmental rules. The hearing on 19 July 2022 ruled in favour
of FYM. On 17 January 2023, the court of appeal returned the appeal claim to
the State Ecological Inspection due to procedural mistakes when filing the
claim and there have been no further legal actions since then.
Based on legal advice obtained, it is management's view that FYM has
compelling arguments to defend its position in the court and, as a
consequence, no associated liabilities have been recognised in relation to
these matters in the consolidated statement of financial position as at 31
December 2022, similar to the position as at 31 December 2021.
Cancellation of licence for Galeschynske deposit
On 24 June 2021, an Order of the President of Ukraine was published on the
official website of the President (the "Order"), which enacted the Decision of
the National Security and Defence Council of Ukraine on the application of
personal special economic and other restrictive measures and sanctions (the
"Decision"). Ferrexpo Belanovo Mining ("FBM") is included in the list of legal
entities which are subject to sanctions pursuant to the Decision. The Order
and the Decision do not provide any legal ground for the application of
sanctions. The sanction imposed on FBM is the cancellation of the mining
licence for the Galeschynske deposit, which is one of two licences held by
FBM.
The Galeschynske deposit is a project in the exploration phase that is
situated to the north of the Group's active mining operations. Following the
cancellation of this license and considering the fact that the outcome of the
proceedings is currently uncertain, all capitalised costs associated with this
licence totalling US$3,439 thousand were written off in the comparative year
ended 31 December 2021. See Note 5 Operating expenses for further information.
The next court hearing is scheduled for 3 April 2023.
Taxation
Tax legislation
As disclosed in Note 8 Taxation, the Group is involved in ongoing tax audits
in respect of its cross-border transactions and an unfavourable outcome would
have an adverse impact on the Group's cash flow generation, profitability and
liquidity. These tax audits are currently on hold due to the ongoing war in
Ukraine and it is unknown when these will resume again. See Note 8 Taxation
and also the update on the Group's Principal Risks on pages 36 to 38 in terms
of the Ukraine country risk.
Note 16: Related party disclosures
During the years presented, the Group entered into arm's length transactions
with entities under the common control of Kostyantin Zhevago, a controlling
shareholder of Ferrexpo plc, with associated companies and with other related
parties. Management considers that the Group has appropriate procedures in
place to identify, control, properly disclose and obtain independent
confirmation, when relevant, for transactions with the related parties.
Entities under common control are those under the control of Kostyantin
Zhevago. Associated companies refer to TIS Ruda LLC, in which the Group holds
an interest of 49.9% (2021: 49.9%). This is the only associated company of the
Group.
Related party transactions entered into by the Group during the years
presented are summarised in the following tables:
Revenue, expenses, finance income and expense
Year ended 31.12.22 Year ended 31.12.21
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under common control related
parties parties
Other sales(a) 560 - 2 657 - 9
Total related party transactions within revenue 560 - 2 657 - 9
Materials and services(b) 6,784 - - 8,334 - -
Spare parts and consumables(c) 7,056 - - 6,350 - -
Other expenses(d) 1,948 - - 2,172 - -
Total related party transactions within cost of sales 15,788 - - 16,856 - -
Selling and distribution expenses(e) 6,542 3,819 - 4,876 18,139 -
General and administration expenses(f) 398 - 567 371 - 524
Other operating expenses(g) 2,019 - - 1,391 - -
Finance expense 8 - - 20 - -
Total related party transactions within expenses 24,755 3,819 567 23,514 18,139 524
Other income - - - 2 - -
Total related party transactions 25,315 3,819 569 24,173 18,139 533
A description of the most material transactions, which are in aggregate over
US$200 thousand in the current or comparative year, is given below.
Entities under common control
The Group entered into various related party transactions with entities under
common control. All transactions were carried out on an arm's length basis in
the normal course of business.
a Sales of scrap metal to OJSC Uzhgorodsky Turbogas totalling US$361
thousand (2021: US$437 thousand); and
a Sales of electricity to Kislorod PPC for US$194 thousand (2021:
US$209 thousand).
b Purchases of oxygen, scrap metal and services from Kislorod PCC for
US$1,437 thousand (2021: US$1,533 thousand);
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for
US$4,258 thousand (2021: US$5,700 thousand); and
b Purchase of maintenance and construction services from FZ Solutions
LLC (formerly OJSC Berdichev Machine-Building Plant Progress) for US$997
thousand (2021: US$1,024).
c Purchases of spare parts from OJSC AvtoKraz Holding in the amount of
US$1,799 thousand (2021: US$1,983 thousand);
c Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair
Plant ("KSRSSZ") in the amount of US$902 thousand (2021: US$837 thousand);
c Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the
amount of US$1,460 thousand (2021: US$1,032 thousand);
c Purchases of spare parts from FZ Solutions LLC (formerly OJSC
Berdichev Machine-Building Plant Progress) of US$1,125 thousand (2021: US$719
thousand);
c Purchases of spare parts from Kislorod PCC in the amount of US$410
thousand (2021: nil); and
c Purchases of spare parts from Valsa GTV of US$1,231 thousand (2021:
US$1,735 thousand).
d Insurance premiums of US$1,948 thousand (2021: US$2,172 thousand)
paid to ASK Omega for insurance cover in respect of mining equipment and
machinery.
e Purchases of advertisement, marketing and general public relations
services from FC Vorskla of US$6,541 thousand (2021: US$4,875 thousand). See
page 69 in respect of a loan relationship between FC Vorskla and another
related party.
g Insurance premiums of US$1,085 thousand (2021: US$1,341 thousand) paid
to ASK Omega for workmen's insurance and other insurances;
g Purchase of marketing services from TV & Radio Company of US$212
thousand (2021: US$243 thousand); and
g Purchase of food under the Ferrexpo Humanitarian Fund from JSC
Kremenchukmyaso of US$798 thousand (2021: nil). See page 30 for further
information on the Ferrexpo Humanitarian Fund.
Associated companies
The Group entered into related party transactions with its associated company,
TIS Ruda LLC, which were carried out on an arm's length basis in the normal
course of business for the members of the Group.
e Purchases of logistics services in the amount of US$3,819 thousand
(2021: US$18,139 thousand) relating to port operations, including port
charges, handling costs, agent commissions and storage costs. The scope of the
services procured from TIS Ruda is heavily affected by the ongoing war in
Ukraine as the Group's seaborne sales through the port of Pivdennyi have been
suspended as a result of the closure of the port.
Other related parties
The Group entered into various transactions with related parties other than
those under the control of a controlling shareholder of Ferrexpo plc. All
transactions were carried out on an arm's length basis in the normal course of
business.
f Legal and administrative services in the amount of US$387 thousand
(2021: US$506 thousand) provided by Kuoni Attorneys at Law Ltd., which is
controlled by a member of the Board of Directors of one of the subsidiaries of
the Group. The Directors' fees paid totalled US$100 thousand for the financial
year 2022 (2021: US$100 thousand).
Purchases of property, plant and equipment
The table below details the transactions of a capital nature, which were
undertaken between Group companies and entities under common control,
associated companies and other related parties during the years presented.
Year ended 31.12.22 Year ended 31.12.21
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under related
parties common parties
control
Purchases in the ordinary course of business 11,634 - - 552 - -
Total purchases of property, plant and equipment 11,634 - - 552 - -
During the year ended 31 December 2022, the Group purchased major spare parts
and equipment from FZ Solutions LLC (formerly OJSC Berdichev Machine-Building
Plant Progress) totalling US$ 11,598 thousand (2021: US$283 thousand) in
respect of the Wave 1 expansion project of its processing plant. During the
comparative year ended 31 December 2021, the Group procured equipment and
materials from CJSC Kyiv Shipbuilding and Ship Repair Plant ("KSRSSZ")
totalling US$235 thousand for maintenance and repairs of its processing plant.
The FPM Charity Fund owns 75% of the Sport & Recreation Centre ("SRC") in
Horishni Plavni and made contributions totalling US$154 thousand during the
year ended 31 December 2022 (2021: US$120 thousand) for the construction and
maintenance of the building, including costs related to electricity, gas and
water consumption. The remaining stake of 25% is owned by JSC F&C Realty,
which is under the control of Kostyantin Zhevago.
Balances with related parties
The outstanding balances, as a result of transactions with related parties,
for the years presented are shown in the table below:
As at 31.12.22 As at 31.12.21
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under common control related
parties
parties
Prepayments for property, plant and equipment(g) 3,847 - - 8,463 - -
Total non-current assets 3,847 - - 8,463 - -
Trade and other receivables(h) 38 3,245 1 101 4,181 1
Prepayments and other current assets(i) 745 120 - 2,076 - -
Total current assets 783 3,365 1 2,177 4,181 1
Trade and other payables( j) 2,057 244 - 732 489 -
Accrued and contract liabilities - - - - - -
Total current liabilities 2,057 244 - 732 489 -
A description of the balances over US$200 thousand in the current or
comparative year is given below.
Entities under common control
g Prepayments for property, plant and equipment totalling US$3,787
thousand (31 December 2021: US$8,422 thousand) were made to FZ Solutions LLC
(formerly OJSC Berdichev Machine-Building Plant Progress) mainly in relation
to the Wave 1 expansion project of the processing plant.
i Prepayments and other current assets totalling US$233 thousand to
ASK Omega for insurance premiums (31 December 2021: US$1,123 thousand),
j Trade and other payables of US$107 thousand (31 December 2021:
US$221 thousand) related to the purchase of oxygen, metal scrap and services
from Kislorod PCC, and
j Trade and other payables of US$1,603 thousand (31 December 2021:
US$295 thousand) related to the purchase of spare parts and services from FZ
Solutions LLC (formerly OJSC Berdichev Machine-Building Plant Progress), and
Associated companies
h Trade and other receivables included US$3,245 thousand (2021:
US$4,181 thousand) related to dividends declared by TIS Ruda LLC.
i Prepayments and other current assets included US$120 thousand
(2021: nil) related to cargo storage services from TIS Ruda LLC.
j Trade and other payables included US$244 thousand (2021: US$489
thousand) related to purchases of logistics services from TIS Ruda LLC.
The Ferrexpo Humanitarian Fund
Following the Russian invasion into Ukraine in February 2022, the Group has
established the Ferrexpo Humanitarian Fund with total approved funding of
US$15,000 thousand in order to support local communities in Ukraine. As at 31
December 2022, the Group procured medicine totalling US$404 thousand from
Arterium LLC and food totalling US$798 thousand from JSC Kremenchukmyaso, both
under common control of Kostyantin Zhevago, a controlling shareholder of
Ferrexpo plc. Whilst the procurements from Arterium LLC have been made
directly by the fund, the procurements from JSC Kremenchukmyaso have been made
through one of the Group's subsidiaries in Ukraine. See page 30 for further
information on the Ferrexpo Humanitarian Fund.
Note 17: Events after the reporting period
As announced on 7 March 2023 on the Regulatory News Service of the London
Stock Exchange, the Group became aware of a press release by the Ukrainian
Deposit Guarantee Fund suggesting that a restriction has been placed on shares
held by Ferrexpo AG (FAG), the Group's Swiss subsidiary, in three main
operating subsidiaries of the Group in Ukraine, covering 50.3% of the shares
held in each subsidiary. Based on the subsequently published court order in
the Ukrainian official register of court decisions, the Kyiv Commercial Court
ordered the arrest (freeze) of 50.3% of FAG's shareholding in each of Ferrexpo
Poltava Mining (FPM), Ferrexpo Yeristovo Mining (FYM) and Ferrexpo Belanovo
Mining (FBM). The court order also prohibits each of FPM, FYM and FBM from
making changes to the amount of its authorised capital. The court order does
not affect ownership of the shares in these three subsidiaries of the Group in
Ukraine, but prohibits the disposal by FAG of 50.3% of its shareholding in
each named subsidiary.
This court order was issued by the Kyiv Commercial Court during a hearing in
the commercial litigation between the Deposit Guarantee Fund and Mr. Zhevago,
the Group's controlling shareholder, in relation to the liquidation of Bank
Finance and Credit in 2015.
As disclosed in detail in Note 30 Commitments, contingencies and legal
disputes in the Group's 2020 Annual Report & Accounts, similar orders to
freeze 50.3% of FAG's shareholding in FPM were received by the Group in
November 2019 and in June 2020, which were subsequently successfully appealed
and cancelled by FAG in the Ukrainian courts.
In addition to the restriction covering 50.3% of FAG's shareholding in each of
FPM, FYM and FBM, the court order also contains a prohibition on Ferrexpo plc
disposing of any of its shares in FAG. Based on legal advice received by the
Group, such prohibition on Ferrexpo plc disposing of its shares in FAG is not
enforceable in the UK and in Switzerland within a short period of time.
The court order also prohibits the disposal by Fevamotinico S.a.r.l. of its
shares in Ferrexpo plc.
The Group has no intention, and never has had any intention, of transferring
the shares in FPM, FYM, FBM or FAG. In addition, no impact on the operations
of the Group is expected as a result of this court order.
The Group intends to take actions in Ukraine to appeal the court order.
Taking into account that the Group has previously successfully appealed
similar court orders, it is management's view that the Group will be again
successful in cancelling such restrictions. However, as with other ongoing
legal proceedings in Ukraine, there is a risk that the independence of the
judicial system and its immunity from economic and political influences in
Ukraine is not upheld and in that case there could be a material adverse
impact on the Group and its shareholders. The next court hearing is scheduled
for 20 March 2023.
As announced on 10 March 2023 on the Regulatory News Service of the London
Stock Exchange, the Group transferred 9,513,000 shares from the treasury share
reserves to the Group's employee benefit trust reserve. The shares were
transferred on 9 March 2023, at a price of 140.3 pence per share, being the
closing share price of the Company's ordinary shares on the London Stock
Exchange on 8 March 2023. Please see the announcement for further information.
Following the transfer of the shares, the issued share capital of Ferrexpo plc
consists of 613,967,956 ordinary shares of 10 pence each, of which 15,830,814
ordinary shares are held in treasury. As a result of this transfer, the
interest of the Group's largest shareholder, Fevamotinico S.a.r.l (see Note 1
Corporate information for further information), in the voting rights of
Ferrexpo plc is now 49.5%.
Other than the events disclosed above, there are no material adjusting or
non-adjusting events that have occurred subsequent to the year end.
Alternative Performance Measures
When assessing and discussing the Group's reported financial performance,
financial position and cash flows, management may make reference to
Alternative Performance Measures ("APMs") that are not defined or specified
under International Financial Reporting Standards ("IFRSs").
APMs are not uniformly defined by all companies, including those in the
Group's industry. Accordingly, the APMs used by the Group may not be
comparable with similarly titled measures and disclosures made by other
companies. APMs should be considered in addition to, and not as a substitute
for or as superior to, measures of financial performance, financial position
or cash flows reported in accordance with IFRSs.
Ferrexpo makes reference to the following APMs in this statement.
C1 cash cost of production
Definition: Non-financial measure, which represents the cash cost of
production of iron pellets from own ore divided by production volume of own
production ore. Non-C1 cost components include non-cash costs such as
depreciation, inventory movements and costs of purchased ore and concentrate.
The Group presents the C1 cash cost of production because it believes it is a
useful operational measure of its cost competitiveness compared to its peer
group.
US$000 Notes Year ended Year ended
31.12.21
31.12.22
C1 cash costs 503,975 626,561
Non-C1 cost components 36,035 71,339
Inventories recognised as an expense upon sale of goods 5 540,010 697,900
Own ore produced (tonnes) 6,053,397 11,220,260
C1 cash cost per tonne (US$) 83.3 55.8
Underlying EBITDA
Definition: The Group calculates the underlying EBITDA as profit before tax
and finance plus depreciation and amortisation, net gains and losses from
disposal of investments and property, plant and equipment, share-based
payments and write-offs and impairment losses. The underlying EBITDA is
presented because it is a useful measure for evaluating the Group's ability to
generate cash and its operating performance. See Note 3 Segment information to
the consolidated financial statements for further details.
Closest equivalent IFRSs measure: Profit before tax and finance.
Rationale for adjustment: The Group presents the underlying EBITDA as it is a
useful measure for evaluating its ability to generate cash and its operating
performance. Also it aids comparability across peer groups as it is a
measurement that is often used.
Reconciliation to closest IFRSs equivalent:
US$000 Notes Year ended Year ended
31.12.21
31.12.22
Underlying EBITDA 765,113 1,438,759
Losses on disposal and liquidation of property, plant and equipment 5 (1,665) (4,695)
Share-based payments (490) (856)
Write-offs and impairments 5 (260,308) (235,618)
Depreciation and amortisation (96,977) (115,112)
Profit before tax and finance 405,673 1,082,478
Diluted earnings per share
Definition: Earnings per share calculated using the diluted number of Ordinary
Shares outstanding.
Closest equivalent IFRSs measure: Diluted earnings per share.
Rationale for adjustment: Excludes the impact of special items that can mask
underlying changes in performance.
Reconciliation to closest IFRSs equivalent:
Year ended Year ended
31.12.22 31.12.21
Earnings for the year attributable to equity shareholders - per share in US
cents
Basic 37.41 148.2
Diluted 37.35 147.9
Net cash/(debt)
Definition: Cash and cash equivalents net of interest-bearing loans and
borrowings.
Closest equivalent IFRSs measure: Cash and cash equivalents.
Rationale for adjustment: Net cash/(debt) is a measurement of the strength of
the Group's balance sheet. It is presented as it is a useful measure to
evaluate the Group's financial liquidity.
Reconciliation to closest IFRS equivalent:
US$000 Notes As at As at
31.12.22 31.12.21
Cash and cash equivalents 13 112,945 167,291
Interest-bearing loans and borrowings - current 14 (5,194) (48,206)
Interest-bearing loans and borrowings - non-current 14 (1,354) (2,143)
Net cash 106,397 116,942
Capital investment
Definition: Capital expenditure for the purchase of property, plant and
equipment and intangible assets.
Closest equivalent IFRSs measure: Purchase of property, plant and equipment
and intangible assets (net cash flows used in investing activities).
Rationale for adjustment: The Group presents the capital investment as it is a
useful measure for evaluating the degree of capital invested in its business
operations.
Reconciliation to closest IFRSs equivalent:
US$000 As at As at
31.12.22 31.12.21
Purchase of property, plant and equipment and intangible assets (net cash 161,010 360,869
flows used in investing activities)
Total liquidity
Definition: Sum of cash and cash equivalents, available committed facilities
and undrawn uncommitted facilities. No committed facilities outstanding as at
31 December 2022 and the end of the comparative year ended 31 December 2021.
Uncommitted facilities include trade finance facilities secured against
receivable balances related to these specific trades. See Note 14
Interest-bearing loans and borrowings for further information.
Closest equivalent IFRSs measure: Cash and cash equivalents.
Rationale for adjustment: The Group presents total liquidity as it is a useful
measure for evaluating its ability to meet short-term business requirements.
Reconciliation to closest IFRSs equivalent:
US$000 Notes As at As at
31.12.22 31.12.21
Cash and cash equivalents 13 112,945 167,291
Undrawn uncommitted facilities − 97,854
Total liquidity 112,945 265,145
1 (#_ftnref1) . Source: S&P Global Commodity Insights.
Items denoted with 'A' are Alternative Performance Measures. See page 75 for
more information.
2 (#_ftnref2) . Source: S&P Global Commodity Insights.
3 (#_ftnref3) . Source: S&P Global Commodity Insights.
4 (#_ftnref4) . Note that 2021 figure for Atlantic Blast Furnace pellet
premium is restated.
5 (#_ftnref5) . Source: Baltic Exchange.
6 (#_ftnref6) . Emissions reduction progress is show on a unit of production
basis; please see page 8 of the Group's Climate Change Report for more
information.
7 (#_ftnref7) . Source: International Energy Agency ("IEA"), link. (Accessed
February 2023.)
8 (#_ftnref8) . Information as of 10 March 2023.
9 (#_ftnref9) . Source: NBU, link
(https://bank.gov.ua/en/markets/exchangerates) . (Accessed 3 March 2023.)
10 (#_ftnref10) . Source: Reuters, link
(https://www.reuters.com/world/europe/ukraines-2022-inflation-hits-266-lower-than-forecast-2023-01-10/)
. (Accessed 3 March 2023.)
11 (#_ftnref11) . Source: Independent research provided by CRU.
12 (#_ftnref12) . Source: S&P Global Commodity Insights.
13 (#_ftnref13) . Source: CME Group, link
(https://www.cmegroup.com/markets/metals/ferrous/iron-ore-62pct-fe-cfr-china-tsi-swap-futures.quotes.html)
(accessed 23 February 2023).
14 (#_ftnref14) . Source: Management estimate.
15 (#_ftnref15) . Source: Management estimate
16 (#_ftnref16) . Source: CRU.
17 (#_ftnref17) . Defined as steelmakers that do not have material volumes
of integrated iron ore supply, excluding pellet imports listed without a
defined destination (12% of the total pellet market, typically relating to
exports from certain producers in the Commonwealth of Independent States
("CIS") and India).
18 (#_ftnref18) . Source: S&P Global Commodity Insights.
19 (#_ftnref19) . Figures restated compared to 2021 Annual Report.
20 (#_ftnref20) . Source: Baltic Exchange.
21 (#_ftnref21) . Source: World Steel Association.
22 (#_ftnref22) . Management estimate.
23 (#_ftnref23) . Source: World Bank, link
(https://www.worldbank.org/en/country/china/overview) . (Accessed 3 March
2023.)
24 (#_ftnref24) Source: World Steel Association.
25 (#_ftnref25) . Source: Bloomberg.
26 (#_ftnref26) . As defined by the World Economic Forum, link
(https://www.weforum.org/agenda/2022/07/green-steel-emissions-net-zero/) .
(Accessed 3 March 2023.)
27 (#_ftnref27) . Source: SteelOrbis, link
(https://www.steelorbis.com/steel-news/latest-news/arcelormittal-europe-ceo-steel-will-cost-60-more-after-green-transition-1192704.htm)
. (Accessed 3 March 2023.)
28 (#_ftnref28) . Source: Bloomberg.
29 (#_ftnref29) . Movements shown are based on quarterly averages.
30 (#_ftnref30) . Source: S&P Global Commodity Insights.
31 (#_ftnref31) . Source: National Bank of Ukraine.
32 (#_ftnref32) . Note that figures shown here in this case study are
preliminary management estimates.
33 (#_ftnref33) . Scope 1 and 2 emissions combined, on a per tonne of
production basis.
34 (#_ftnref34) . Scope 3 emissions on a per tonne of production basis
35 (#_ftnref35) . Information as of 14 March 2023.
36 (#_ftnref36) . LTIFR full year average for 2017-2021.
37 (#_ftnref37) . Source: Government of Western Australia, link
(https://www.dmp.wa.gov.au/Documents/Safety/Safety%20performance%20in%20the%20Western%20Australian%20mineral%20industry%202020-21%20-%20report.pdf)
. (Accessed 3 March 2023.)
38 (#_ftnref38) . Indicators shown on a Group basis.
39 (#_ftnref39) . Indicators shown for Ukrainian operations only.
40 (#_ftnref40) . Figure incorrectly provided as TRIFR in prior report.
41 (#_ftnref41) . Source: European Union Emissions Trading System, link
(https://tradingeconomics.com/commodity/carbon) . (Accessed 3 March 2023.)
42 (#_ftnref42) . Scope 1 and Scope 2 emissions are presented on a per tonne
of production basis.
43 (#_ftnref43) . Scope 3 emissions savings are presented on a per tonne of
production basis.
44 (#_ftnref44) . Prior to the 2021 Annual Report and Account, Scope 2
calculations included the purchase of steam for heating purposes, which have
subsequently been excluded following the independent assurance process
completed in 2022. For more information, please see the Reporting Criteria
document provided alongside the 2021 Annual Report and Accounts on the Group's
website.
45 (#_ftnref45) . Source: CRU. Natural gas based direct reduction without
carbon capture. See page 10 of the 2021 Annual Report for more information.
46 (#_ftnref46) . Source: TPI Centre, link
(https://www.transitionpathwayinitiative.org/publications/65.pdf) . (Accessed
3 March 2023.)
47 (#_ftnref47) . Source: CRU. Natural gas based direct reduction without
carbon capture.
48 (#_ftnref48) . Comprising mining companies in the FTSE 350 Index where
the main focus of mining is outside of Australia and Canada.
49 (#_ftnref49) Source: World Bank, link
(https://datatopics.worldbank.org/world-development-indicators/the-world-by-income-and-region.html)
. (Accessed 3 March 2023.)
50 (#_ftnref50) Source: UNDP, link
(https://hdr.undp.org/data-center/human-development-index#/indicies/HDI) .
(Accessed 3 March 2023.)
51 (#_ftnref51) . Source: Transparency International, link
(https://www.transparency.org/en/cpi/2022) . (Accessed 3 March 2023.)
52 (#_ftnref52) As of 28 February 2023.
53 (#_ftnref53) . Source: S&P Global Commodity Insights.
54 (#_ftnref54) . Source: S&P Global Commodity Insights.
55 (#_ftnref55) . Source: CRU.
56 (#_ftnref56) . Source: S&P Global Commodity Insights.
57 (#_ftnref57) . Source: Baltic Index.
58 (#_ftnref58) . Source: Reuters, link
(https://www.reuters.com/world/europe/ukraines-2022-inflation-hits-266-lower-than-forecast-2023-01-10/)
. (Accessed 3 March 2023.)
59 (#_ftnref59) . Source: World Bank, link
(https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=UA) . (Accessed
3 March 2023.)
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